India may use forex reserves to finance CAD, World Bank says.

NEW DELHI: India may have to dip into its foreign exchange reserves to finance the current account deficit (CAD) in 2013-14, the World Bank said.

"International reserves could decline somewhat in 2013-14 but would still amount to a comfortable import cover of approximately five months," the World Bank said in its latest India Development Update.

Economic affairs secretary Arvind Mayaram had said earlier this month that India would finance its CAD this year without drawing down on its reserves. C Rangarajan, chairman of the Prime Minister's economic advisory council, had said India may have to draw about $9 billion from its foreign exchange reserves to finance the CAD.

The CAD for the first quarter of the current financial year was $21.8 billion, or 4.9 per cent of gross domestic product, driven by sluggish exports and high gold imports in April and May.

Gold imports increased by $7.3 billion in the first quarter this fiscal. Inward shipments of the metal stood at about 335 tonnes in the April-June quarter.

The government plans to narrow the CAD to $70 billion, or 3.7 per cent of GDP, in 2013-14 from $88.2 billion, or 4.8 per cent, in 2012-13.

The World Bank estimates the country's CAD will narrow to 4.1 per cent of GDP this year and to 3.7 per cent in FY15.

Noting that financing of the CAD is unlikely to present major challenges, the World Bank said, "In 2013-14, the financing mix is expected to be similar to the average performance of the last few years: FDI is expected to improve marginally from 2012-13 (a down year) while FII would come down somewhat from the highs of last fiscal."

As long as NRI deposits remain similar to last year and under varying assumptions about the availability of trade credits, the remaining 2013-14 external financing requirements would range between $3-10 billion, which should be relatively comfortably financed via foreign borrowing, it said.

Source : timesofindia.indiatimes.com