Current Account Deficit

June 30, 2023

The current account deficit (CAD) plays a crucial role in assessing a country’s external sector. It measures the difference between the value of a nation’s imports and exports of goods and services.

Understanding CAD

Current Account Deficit serves as a significant indicator of a country’s external economic performance. It reflects the situation when a nation’s import expenditure exceeds its export earnings. Alongside the fiscal deficit, which represents the gap between government expenditures and revenues, CAD is considered a concern for both the stock market and investors.

Shrinking CAD in Q4 FY2022

During the January-March quarter of FY2023, CAD witnessed a notable reduction. It narrowed down to $1.3 billion, accounting for 0.2% of the Gross Domestic Product (GDP). This positive development in CAD can be attributed to multiple factors.

Contributing Factors for the Narrowing of CAD

The moderation in the trade deficit played a significant role in the reduction of CAD during Q4 FY2022. Furthermore, the robust performance of services exports and increased remittances, particularly through private transfer receipts, contributed to the positive trend. Remittances from Indians employed overseas increased by 20.8% compared to the previous year, further bolstering the narrowing of CAD.

CAD and its Impact on the Stock Market

CAD, along with the fiscal deficit, is viewed as an adversary of the stock market and investors. A higher CAD indicates a greater need for foreign savings to fill the financing gap. Conversely, a lower CAD signifies greater resilience within the economy, as it reduces vulnerability to external factors.

FY2023 Performance and Expectations for FY2024

In FY2023, CAD widened to 2% of GDP, surpassing the previous year’s 1.2% deficit. This increase in CAD was primarily due to a widening trade deficit, reaching $265.3 billion compared to $189.5 billion in the previous fiscal year.

Looking ahead to FY2024, experts anticipate a moderation in CAD. Factors such as lower commodity prices and a surge in portfolio flows during the April-June quarter are expected to offset slower exports. The projected CAD range for FY2024 is between 1.2% and 1.6% of GDP.

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