CURRENT ACCOUNT DEFICIT

While data released by the government shows that India's exports and imports declined by 6.59 per cent and 3.63 per cent respectively in January.

The Current Account Deficit (CAD) refers to a situation where a country's total imports of goods, services, investment incomes, and unilateral transfers exceed its total exports. It represents a deficit or negative balance in the country's current account, which is a component of its balance of payments.
CAD reflects a nation's dependence on foreign sources to finance its consumption and investment. A persistent deficit in the current account might indicate that a country is spending more on foreign goods and services than it is earning, leading to increased borrowing from other countries to cover the shortfall.
This deficit is not necessarily negative on its own, as it can be financed by foreign investments or borrowing. However, if it becomes unsustainable or grows excessively large, it could pose risks to the country's economic stability, currency value, and overall financial health. Governments often monitor and aim to manage their current account deficits to maintain a healthy balance in their economy.

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.
CAD and the fiscal deficit together make up the twin deficits the enemies of the stock market and investors.
If the current account of the country's trade and transactions with other countries show a surplus, that indicates money is flowing into the country, boosting the foreign exchange reserves and the value of the 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.

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.
CAD for the first half of 2022-23 stood at 3.3. per cent of the GDP.
The situation has shown improvement in Q3: 2022-23 as imports moderated in the wake of lower commodity prices, resulting in the narrowing of the merchandise trade deficit.

January trade deficit 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 festival season (Such as lower imports of transport equipment) and the seasonal impact of the Chinese New Year holidays.
On the other hand, after the Rs 26, 000 crore sell-off by foreign portfolio investors in January, FPI outflows have come down to Rs 4, 400 crores in February so far.
Workers' remittances went up to $ 30 billion in the April-September 2022 period from $ 25. 48 billion in the same period a year ago.
At the same time, gold imports fell to $20 billion from $ 23.9 billion a year ago.

While there is a perception in the markets that capital flows could come under some pressure with China's reopening and any deviations in monetary policy expectations, inflows are expected to increase the economy on the whole as foreign investors are unlikely to keep away from India, which is expected to witness one of the highest growth rates among large economies.
At a time when the economies of many developed markets are expected to take a hit, the RBI has projected the GDP growth for the next fiscal (FY2024) at 6.4 per cent and the Union Budget has indicated a capital expenditure of Rs 10 lakh crore (over $120 billion).
Moreover, with the rise in interest rates in India after the RBI hiked the repo rate by 250 basis points to 6.50 per cent, non-resident Indian deposits, remittances and FPI investment in debt are expected to rise further.
NRI deposits had increased by $3.62 billion to $ 134.49 billion in the April-November period of 2022.
Capital flow into India came under pressure in 2022 following the sharp rise in interest rates in the US.
While FPIs pulled out Rs 121, 439 crores in 2022, even in the first six weeks of 2023, the FPI flow has been negative and the equity markets have witnessed a net outflow of Rs 32, 887 crores till February 16.
While the flow of capital will depend upon the interest rate movement and currency movements vis-a-vis the US dollar, there is optimism among global investors about India.

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.
The benchmark Sensex at BSE rose 407 points intraday on Thursday before closing at 61, 319 with a gain of 44 points or 0.07 per cent.
CAD is very important for the currency and the value of an economy hinges a lot on the value of its currency thereby, it also supports the equity markets by keeping the fund flow intact.
While the numbers for January have come good, experts say this needs to be sustained.

For Prelims: Current Account Deficit, RBI, Union Budget, GDP, Capital flow,

For Mains:

1. What is Current Account Deficit? Discuss its significance and impact on the Indian market (250 Words)

Source: The Indian Express

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