Current account deficit likely to be 2.7 percent of GDP: Rangarajan

India’s current account deficit this fiscal is expected to be 2.7 percent of the gross domestic product (GDP) and capital inflows are likely to be around $73 billion, said C. Rangarajan, chairman of prime minister’s economic advisory council, Saturday.

“This (capital inflows) will go to cover the current account deficit and add to reserves of a modest sum of $31 billion. Thus, with a

moderate surplus on the capital account after meeting the current account deficit, the exchange rate variations will stay within an acceptable range,” he said.

Delivering a lecture on Globalization and the International Financial Crisis, he underlined the need for bringing down the current account deficit.

The deficit, however, will not pose a financing problem to Indian economy as the capital inflows were expected to be adequate, he said.

“With globalization, capital inflows need to be managed with an appropriate balance between market forces and regulation,” he said at the the foundation day lecture at School of Management Studies, University of Hyderabad.

He suggested that the best policy option to tackle large capital inflows is strong economic growth which can absorb the large inflows without affecting the macro economic stability.

“So long as there are saving-investment imbalances, capital flows will remain. The art of the management of capital inflows lies in discouraging short term volatile flows and encouraging long term quasi-permanent flows,” he said.

Stating that the current financial crisis exposed the weaknesses of the regulatory framework particularly in the advanced countries, the former Reserve Bank of India governor felt that regulatory reform agenda in a globalized world must be more or less uniform across countries.

Rangarajan suggested that the regulatory framework should cover all segments of the financial markets, systemically important financial institutions and should receive special attention.

He said institutions may set up buffers in good times to be drawn in bad times and excessive leverage in banks may be contained through additional supplements to the risk based capital ratio.

He said the current international financial crisis has brought out in a stark way the impact of globalization.

Globalization spreads both prosperity and distress. The contagion works both ways, he said.

“The coming years may see increasing restrictions being put on financial services. Developing countries may not want to see unfettered freedom in the flow of funds. As in the case of everything, there is a need to have a balanced view here,” he said.