"Last year, CAD (current account deficit) was 4.2 per cent of GDP, but this year we expect it would be significantly higher than that. It's going to be historically the highest CAD measured as a proportion of GDP," the RBI governor said, though he refrained from giving any figure.
He also expressed concern over the way current account deficit, which is the gap between forex gained and forex spent, is being financed by volatile inflows instead of more foreign direct investments.
Mr Subbarao was addressing the convocation ceremony of the RBI-set up Indira Gandhi Institute of Development Research (IGIDR).
The trade gap is widening mainly because of higher import of oil and gold. The third quarter numbers are expected later this week.
Flagging his concerns over current account deficit, which was the overriding theme of the third quarter monetary policy announced on January 29, Mr Subbarao said these were regarding its level, quality and the way it is being financed.
"We would not worry if the widening CAS is on account of import of capital goods, but here it is high on account of import of oil and gold. The other concern is the way we are financing it. We are financing our CAD through increasingly volatile flows. Instead, we should ideally be getting as much of FDI as possible to finance the CAD. On the other hand, what we are getting is a lot of volatile flows to finance it," he said.
In FY12, after hitting a high CAD of 4.3 per cent, which was then a record, CAD had declined to 3.9 per cent of GDP, though it was 10 bps above the year ago period.
According to both the government and the RBI, a 2.5-3 per cent current account deficit is sustainable, otherwise it can impact the balance of payments (BoP) position.
The rising current account deficit is blamed on the falling health of the external sector.
Besides, the domestic manufacturing sector has also maintained a low growth at 0.8 per cent during the second quarter against 2.9 per cent growth a year ago.
The growth of services sector, including insurance and real estate, stood at 9.4 per cent in Q2 against 9.9 per cent in same quarter of last fiscal year.
For the first nine months of the fiscal year, the manufacturing sector grew just 0.1 per cent. The Q1 current account deficit improvement to 3.9 per cent was supported by a sharper decline in imports compared with exports. In the FY12, it stood at 4.2 per cent.
However, as a proportion of GDP, even during Q1, CAD rose to 3.9 per cent against 3.8 per cent a year ago.