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Risks to current account deficit remain

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SummaryThe risks to India’s current account deficit widening remain, Subir Gokarn, deputy governor, the Reserve Bank of India, told reporters in Mumbai on Monday.

The risks to India’s current account deficit widening remain, Subir Gokarn, deputy governor, the Reserve Bank of India (RBI), told reporters in Mumbai on Monday. Gokarn added that the Budget proposal addressed the vulnerability of inflows. However, Gokarn said, RBI's preference for debt inflows in the least.

The deputy governor observed that the government’s borrowing plan for the next fiscal year, starting in April, 2011, does not pose a challenge. “There will be no pressure in managing the government borrowing programme.'' Fiscal consolidation is moving in the “right direction,” and the borrowing plan doesn’t pose a challenge, Gokarn said, adding that the borrowing calendar for 2011-12 would be drawn up in March in consultation with the government.

Speaking on inflation, Gokarn said that the inflation outlook hasn't changed after the budget and that the budget recognises the structural nature of food inflation. In its quarterly monetary policy review in the last week of January, the RBI had raised its inflation projection to 7% from 5.5%. The RBI which has raised its key policy rate, the repo rate, benchmark repurchase rate seven times in the past year to 6.5%, signalled more increases on January, 25, 2011, as it urged the government to cut subsidies and tighten the fiscal policy alongside rising borrowing costs to defeat inflation.

Gokarn observed that, the liquidity situation in financial year 2012 will be less volatile. With the RBI encouraging liquidity to be just adequate banks have been resorting to borrowing from the central bank’s special liquidity adjustment facility (LAF) windows. While the amount accessed has fallen over the past month or so, there have been a couple of occasions even in recent weeks, when banks borrowed Rs one lakh crore from the special LAF windows.

Moreover, Gokarn observed that the budget proposals would facilitate infrastructure financing. The government has proposed the setting infrastructure funds to attract foreign investors and has lowered the withholding tax to 5% from 20%. Moreover, the government has allowed foreign investors to invest an additional $20 billion in infrastructure bonds with a residual maturity of five years.

The government’s proposed capitalisation of public sector banks, the deputy governor said, would add stability to the system. He also added that the RBI is line with the time frame for new bank norms. The finance minister, in his budget speech, said the central bank would issue final guidelines on permitting new

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