How a narrower CAD helps stabilise the rupee
rupee was the most stable emerging market currency in the past year amid global economic uncertainty. What are the factors that contributed to its relative stability? It is largely the narrowing current account deficit (CAD), besides robust economic fundamentals. Atmadip Ray explains how CAD influences the rupee movement and what are the consequences of a high deficit ratio.
What is CAD?
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 considers the sum of trade balance and net income of companies from abroad. The current account deficit or surplus is expressed as a percentage of gross domestic product.
What is the relation between a country's CAD and its currency?
When the current account turns into a 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 a higher demand for dollars.
What is India's CAD?
India's CAD narrowed sharply to 1% of GDP in Q2FY24 from 3.8% in Q2FY23. This means the demand for the dollar vis-a-vis the rupee decreased when compared to a year earlier.
How did the 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 on January 2, the first trading
