ET Explainer: How current account deficit influences rupee's movement
Indian rupee was the most stable of the emerging market currencies in the last year? It's largely the narrowing current account deficit (CAD), besides other strong economic fundamentals. Here's an ET Explainer on how the CAD influences the rupee movement and what are the consequences of a high deficit ratio.
What is the current account deficit?
A country's current account is a calculation of the total value of goods and services imported and exported. If the value of goods and services imported exceeds the value of goods and services exported then the current account turns into deficit mode. It takes into account the sum of trade balance and net income of companies from abroad. Current account deficit or surplus is expressed as a percentage of a country's gross domestic product.
What is the relation between a country's CAD and its currency?
When the current account turns deficit, then the country needs to pay more than it earns from the external sector. Therefore, there would be excess demand for foreign currency. In India's case, a deficit means higher demand for dollars.
What is India's current account deficit?
India’s current account deficit dipped sharply to 1.0 per cent of GDP in Q2:2023-24 from 3.8 per cent in Q2:2022-23. This means the demand for dollar vis a vis rupee decreased when compared to a year back situation.
How did the Indian rupee fare in 2023?
The rupee was one of the best performing currencies and the least volatile among global peers in 2023. The rupee opened at 82.66 against the dollar
