India’s current account deficit is on the rise. What implications does this have for the Indian economy?

In June this year, the Ministry of Finance spoke at length about the problem of the “double deficit” in India, which basically corresponds to the budget deficit and the current account deficit (CAD). With a booming trade deficit, India’s current account deficit is also widening. According to a latest Reuters poll, India’s current account deficit likely hit its highest level in almost a decade in the April-June quarter, driven by soaring global commodity prices and the most important capital outflows since the global financial crisis of 2008.

Today, as the Indian rupee hit a record high of 81 against the US dollar, coupled with a widening trade gap, concerns over the scale of the current account deficit in Asia’s third-largest economy, which has been eating away at investor confidence for months, are set to intensify. According to brokerage Motilal Oswal Financial Services, India’s current account deficit is likely to hit a ten-year high of 3.8% of gross domestic product (GDP) in 2022-23, up from 1.2% last year. . He estimated the CAD would widen 3.7% of GDP in the first quarter and peak at 5.5% in the second quarter amid continued global headwinds.

“We really need to focus on CAD; 3 percent of GDP is a high limit. You really have to get the point down because some of the things that have contributed to the increase in our [forex] reserves, are volatile by nature. And these are the ones that really drive the exchange rate down,” said renowned economist and former RBI Governor C. Rangarajan.

What does the rising CAD mean for the nation?

The CAD, as of now, is driven by India’s burgeoning trade deficit. With the depreciation of the Rupee, imports become more expensive, therefore, for a country like India, which imports expensive items and products like crude oil, semiconductors and electronics, the burden on the Treasury increases and this pushes the current account deficit higher. In addition, the deterioration of the CAD is putting pressure on capital account inflows.

So, in the current scenario, the current account deficit is likely to inflate, and as a result, the demand for foreign currency will also increase, causing the domestic currency to depreciate. And the depreciation of the currency and the increase in the current account deficit will lead to capital flight out of India. Another aspect of rupee depreciation is rising imported inflation, which in turn leads to rising generalized inflation in India. So, to curb volatility, the RBI also ensures that the rupee does not fall sharply as this may increase inflation in the economy. It makes periodic “interventions” in the foreign exchange markets by selling foreign currencies and buying rupees.

Also Read: Wealthy Indians Invest in Foreign Government Immigration Programs. What are the most popular?

Also Read: S&P Global Forecasts India’s GDP Growth at 7.3% in 2022-23, 6.5% for Next Financial Year

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