RBI governor warns on record current account gap

Reserve Bank of India (RBI) Governor Duvvuri Subbarao smiles after arriving for a quarterly interest rate review briefing at the RBI headquarters in Mumbai January 29, 2013.

MUMBAI (Reuters) - India's current account deficit is likely to reach a record high in the fiscal year that ends in March, its central bank governor warned, a gap which the bank said previously needed to shrink for it to cut interest rates further.

Reserve Bank of India Governor Duvvuri Subbarao said in a speech on Monday the country needed more foreign investment in assets such as plants and equipment rather than in its equity and debt markets, which investors can withdraw quickly.

"We are financing our current account deficit through increasingly volatile flows. Instead we should ideally be getting as much foreign direct investment as possible to finance the current account deficit," he said.

India's current account gap widened to a record high of 5.4 percent of GDP in the September quarter.

The Reserve Bank of India cut interest rates for the first time in nine months last month but warned at the time that a lower current account deficit and easing inflation would be needed for it to make more cuts.

In the previous fiscal year, the current account deficit was 4.2 percent of GDP, and economists are expecting it to be close to 5 percent of GDP for the current fiscal year.

"Today, the external sector is vulnerable," Subbarao said.

"We would not worry so much if the current account deficit was on account of import of capital goods. But here we are having a current account deficit because of import of oil, because of import of gold," he said.

India recently raised import tariffs on gold in order to slow imports.

(Reporting by Shamik Paul; editing by Jane Baird)