In News
- The recent data indicated that the current account deficit (CAD) will moderate despite the global slowdown triggered by rising inflation and interest rates.
About the recent trend of moderation
- About:
- According to the RBI, the CAD, which was at $36.4 billion for the quarter ending September 2022, is expected to moderate in the second half of 2022-23 and remain eminently manageable and within the parameters of viability.
- The moderation in CAD, expected to be aided by
- The fall in commodity prices,
- Rising worker’s remittances and services exports, and
- Abatement of selling pressure by foreign investors, is set to boost sentiment on the investment front, as it will also bring the pressure off the currency.
|
More about CAD
- Meaning:
- When the value of the goods and services that a country imports exceed the value of the products it exports, it is called the current account deficit.
- Twin deficits:
- CAD and the fiscal deficit together make up the twin deficits – the enemies of the stock market and investors.
- Difference with the Balance of Trade:
- It is slightly different from the Balance of Trade, which measures only the gap in earnings and expenditure on exports and imports of goods and services.
- Whereas, the current account also factors in the payments from domestic capital deployed overseas.
- For example, rental income from an Indian owning a house in the UK would be computed in the Current Account, but not in the Balance of Trade.
- Significance:
- If the current account – the country’s trade and transactions with other countries – shows surplus, that indicates money is flowing into the country, boosting the foreign exchange reserves and the value of rupee against the dollar.
- These are factors that will have ramifications on the economy and the stock markets as well as on returns on investments by people.
- Indicator of Economy:
- CAD may be a positive or negative indicator for an economy depending upon why it is running a deficit.
- Foreign capital is seen to have been used to finance investments in many economies.
- It may help a debtor nation in the short-term, but it may worry in the long-term as investors begin raising concerns over adequate return on their investments.
- India’s position:
- India’s current account position is largely on the deficit side because of the country’s dependence on oil imports.
- Ways of reducing CAD:
- The Current Account Deficit can be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.
About the “Current Account”
- A nation’s Current Account maintains a record of the country’s transactions with other nations. It comprises the following components:
- trade of goods and services,
- net earnings on overseas investments and net transfer of payments over a period of time, such as remittances
- This account goes into a deficit when money sent outward exceeds that coming inward.
- Calculation:
- It is measured as a percentage of GDP.
- Trade gap = Exports – Imports.
- Current Account = Trade gap + Net current transfers + Net income abroad.
|
Reasons for narrowing trade deficit
- The trade deficit (for Jan 2023) narrowed to $17.7 billion, led by a sharp fall in imports, while exports fell by a smaller amount.
- The sharp drop in imports was due to:
- Non-oil imports falling, mainly due to a price impact (softening in coal prices from mid-December),
- Likely softening in domestic demand post the festive season (such as lower imports of transport equipment), and
- Seasonal impact of the Chinese New Year holidays
- Other factors:
- On the other hand, after the Rs26,000 crore sell-off by foreign portfolio investors in January, FPI outflows have come down to Rs4,400 crore in February so far.
- At the same time, gold imports fell to $20 billion from $23.9 billion a year ago.
Impact of moderating CAD on market
- While rising CAD raises concerns among investors as it hurts the currency and thereby the inflow of funds into the markets, a notable decline in CAD in January has improved market sentiments.
- Experts believe that CAD is very important for the currency. The value of an economy hinges a lot on the value of its currency and thereby, it also supports the equity markets by keeping the fund flow intact.
Source: IE
