India’s central bank has said that the high Current Account Deficit (CAD) is the biggest risk to the Indian economy at present and hinted that if the worrying trend continues then the monetary policy might be reversed.

RBI Governor D Subbarao said, “The biggest risk to the economy stems from the CAD which, last year, was historically the highest... Monetary policy will also have to remain alert to the risks on the account of the CAD and its financing, which could warrant a swift reversal of the policy stance.”

The Prime Minister's Economic Advisory Council (PMEAC) has said that India’s CAD is expected to be around 5 per cent of GDP for 2012-13. The CAD had touched it’s highest at 6.7 per cent of the GDP in the third quarter of the financial year 2012-2013. The RBI said that the outlook for advanced economies remains uncertain and this may lead to outflow of funds form emerging countries.

The central bank also said that the high level of CAD will put effect the government’s ability to service its existing laibilties. Planning Commission deputy chairman Montek Singh Ahluwalia has said that he expects the country’s current account deficit (CAD) to come down to 2.5 per cent of gross domestic product (GDP) in the next two to three years from about 5 per cent at present.