India's strong dependence on external and short term debts for financing current account deficit remains a concern even as the deficit may be moderated in the fourth quarter due to fall in global commodity prices. 

Reserve Bank of India said volatility in such flows remains a risk as the global economic recovery continued to remain weak. "Private sector external debt has become large and some prudence may be necessary on external commercial borrowing (ECBs) and short-term trade credit," it said in a report on macroeconomic and monetary development, which sets the tone for monetary policy statement. 

The country's external debt rose due to a higher dependence on ECBs and short term borrowings to finance CAD, the central bank said. Short-term debt on a residual maturity basis rose to 44% of total debt and 56% of the foreign exchange reserves by end-December 2012. 

"What worries me is the way current account deficit is being financed," said economistBrinda Jagirdar, who has retired from State Bank of India just recently. 

Modest pick-up in exports and some deceleration in imports are likely to help moderate current account deficit in the fourth quarter of 2012-13 after a record high of 6.7% of GDP in the previous quarter. Current account in 2013-14 is also likely to benefit from fall in global commodity prices including oil and gold. However, the ratio FY13 is expected to be around 5%, twice the sustainable level. 

"Current account deficit, even at this large level, could be fully financed by capital in flows during 2012-13 but the volatility in such flows remains a risk," RBI said on Thursday. 

"It is necessary to lower external sector risks by lowering current account deficit to its sustainable level and not become complacent about external in flows," RBI said, as the possibility of capital outflows remains a concern due to the slowing growth and global macro-financial risks. 

RBI said that external vulnerability indicators worsened further in Q3 of 2012-13. Economies with high deficit are always remain cautious about external imbalances as sustainability of the deficit faces a risk from sudden geo-political shocks that may cause a sudden stop or reversals of capital inflows. 

However, India's third quarter CAD was financed by capital inflows without any reserve depletion. The central bank underscored the need for structural adjustment in the current account through productivity enhancements to boost competitiveness. "Going forward, the government's recent initiatives to curtail the fiscal deficit, if pursued along the indicated path, are likely to reduce pressure on the CAD and lower twin deficit risks," it said. (Economic Times)