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MC Explains | India’s current account deficit conundrum

This financial year is likely to see a current account deficit of 3.3 percent to 3.9 percent of the GDP, depending on which brokerage one chooses to believe

November 17, 2022 / 02:34 PM IST
Representative image

Representative image

India’s trade deficit widened in October as exports shank to a 20-month low in the April-October period, while the merchandise trade deficit doubled from a year ago, reigniting concerns over the widening current account deficit (CAD).

What is current account deficit?

The current account balance is the difference between the value of exports of goods and services and the value of imports of goods and services, according to International Monetary Fund (IMF).

A deficit means that India is importing more goods and services than it is exporting. The current account also includes net income, such as interest and dividends, and transfers from abroad such as foreign aid, which are usually a small fraction of the total, according to the IMF.

India typically runs a current account deficit as it is a developing economy which relies on imports of several commodities like crude oil.

Remember, a current account deficit is not necessarily a bad thing.

Also read: MC Explains| October exports decline; should the markets be worried?

The current account red line

For India, a current account deficit of around 2.5-to-3 percent of the gross domestic product is said to be sustainable. Deficits beyond this threshold are a cause for concern.

While the country saw a rare current account surplus in FY2020-21, it slipped back into deficit in FY2021-22.

MC Explains

This financial year is likely to see a current account deficit of 3.3 percent to 3.9 percent of GDP, depending on which brokerage one chooses to believe.

In September, the Reserve Bank of India said it expected the deficit staying within 3 percent of the GDP, which might be difficult as a global slowdown may further dent exports.

Also read: Current account deficit pips inflation as India’s major challenge at the moment: Analysts

So, is it all doom and gloom?

Not yet. India is the world’s fastest growing major economy and now has a strong and more resilient formal sector.

Policymakers have been proactive in managing the fallout of recent crises such as the coronavirus pandemic and Russia’s invasion of Ukraine. Trust that they will protect the country from external shocks.

The Reserve Bank of India has adequate reserves in its war chest and has been hiking interest rates to cool domestic inflation.

The RBI, which does not target any particular level for the rupee, has been selling dollars to curb the volatility in the exchange rate.

Globally, currencies have been battered by the rise of the greenback as the Federal Reserve has been aggressive in tightening monetary policy.

Also read: After October trade data, Nomura says CY23 GDP growth to fall 250 bps to 4.7%

RBI Governor Shaktikanta Das on November 12 defended the central bank's interventions to alleviate pressure on the rupee, saying foreign exchange reserves have to be used in precisely such situations.

India’s forex reserves stood at $530 billion on November 4, down $111 billion from the same time last year. Das said India was prepared for hot money outflows and that the reserves were very comfortable.

India continues to be an attractive investment destination, both for short- and long-term investments.

The forthcoming budget is also expected to give a further boost to domestic industry and include steps to boost economic growth.

Moneycontrol News
first published: Nov 16, 2022 04:13 pm