Moderating Current Account Deficit

Subject : Economy

Section : External sector

Concept :

There are indications that the current account deficit (CAD) will moderate despite the global slowdown triggered by the rising inflation and interest rates.
According to the RBI, the CAD was at $36.4 billion for the quarter ending September 2022 and is expected to moderate in the second half of 2022-23.
CAD for the first half of 2022-23 stood at 3.3% of GDP.
The situation has shown improvement in Q3:2022-23 as imports moderated in the wake of lower commodity prices, resulting in narrowing of the merchandise trade deficit.

Factors responsible for moderating CAD :

The moderation in CAD was aided by:
the fall in commodity prices,
rising workers remittances and services exports, and
abatement of selling pressure by foreign investors.
Recently, there has been sharp drop in imports which also led to the moderation of CAD.
This sharp decline in imports was due to:
Non-oil imports falling, mainly due to a price impact;
Softening in domestic demand post the festive season;
Seasonal impact of the Chinese New Year holidays.

How will moderating CAD impact the 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.
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.

Current Account Deficit (CAD)

It is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports.
The current account includes net income, including interest and dividends, and transfers, like foreign aid.
It represents a country’s foreign transactions and, like the capital account, is a component of a country’s Balance of payments (BOP).

Significance of CAD

CAD and the fiscal deficit together make up the twin deficits – the enemies of the stock market and investors.
If the current account shows surplus, that indicates money is flowing into the country, boosting the foreign exchange reserves and the value of rupee against the dollar.
While an existing deficit can imply that a country is spending beyond its means, having a current account deficit is not inherently disadvantageous.
If a country uses external debt to finance investments that have higher returns than the interest rate on the debt, the country can remain solvent while running a current account deficit.
If a country is unlikely to cover current debt levels with future revenue streams, however, it may become insolvent.