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- The recent data indicated that the current account deficit (CAD) will moderate despite the global slowdown triggered by rising inflation and interest rates.
About the recent trend of moderation
- About:
- 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.
- The moderation in CAD, expected to be aided by
- The fall in commodity prices,
- Rising worker’s remittances and services exports, and
- Abatement of selling pressure by foreign investors, is set to boost sentiment on the investment front, as it will also bring the pressure off the currency.
More about CAD
About the “Current Account”
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Reasons for narrowing trade deficit
- The trade deficit (for Jan 2023) 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 festive season (such as lower imports of transport equipment), and
- Seasonal impact of the Chinese New Year holidays
- Other factors:
- On the other hand, after the Rs26,000 crore sell-off by foreign portfolio investors in January, FPI outflows have come down to Rs4,400 crore in February so far.
- At the same time, gold imports fell to $20 billion from $23.9 billion a year ago.
Impact of moderating CAD on market
- 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.
- Experts believe that CAD is very important for the currency. The value of an economy hinges a lot on the value of its currency and thereby, it also supports the equity markets by keeping the fund flow intact.
Source: IE
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