India can sustain 2.5%-3% current account deficit: RBI

MUMBAI: India can sustain a current account deficit (CAD) of 2.5% to 3% of the gross domestic product (GDP) without getting into an external crisis, RBI deputy governor Michael Patra said on Saturday. He added that India would also require to reverse the trend of decelerating savings rate, which began in 2012-13.
The deputy governor was speaking at an event organized by the RBI to celebrate 75 years of Independence (Azadi ka Amrit Mahotsav) in Bhubaneshwar. Patra’s statement comes at a time when some forecasters are warning that the CAD could exceed 3% of the GDP this year because of widening gap between exports and imports. Trade deficit hit a monthly high of $30 billion in July.
In his speech, Patra highlighted the inherent strength of the Indian currency, pointing out the purchasing power using the Big Mac index. “An often-used example is the McDonald’s burger, which is supposed to have the same wheat, potatoes and other ingredients in every outlet in every country. To show you how this works, with the money paid in the US for a Big Macone can buy 2.5 Macs in India,” said Patra.
“In terms of purchasing power parity, the exchange rate appreciates with the prosperity of a nation and a rise in its productivity. The Indonesian Rupiah is set to become the strongest currency in the world, with the Indian Rupee emerging as the second strongest currency,” he said. Speaking on domestic savings, he said a striking feature in India is that our growth is home financed — investment is financed primarily by domestic savings, with foreign savings playing only a supplemental role.