Current Account
A nation's current account records its transactions with the rest of the world - specifically its net trade in goods and services, net earnings on cross-border investments, and its net transfer payments over a defined period of time. A positive current account balance (surplus) indicates the nation is a net lender to the rest of the world, while a negative current account balance (deficit) indicates that it is a net borrower from the rest of the world. A current account surplus increases a nation's net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount.
Factors impacting the Current Account:
- Trade Balance - During a strong economic expansion, import volumes typically surge. However, if exports do not grow proportionately, the current account deficit widens. Conversely, during a recession, the current account deficit shrinks if imports decline and exports increase.
- Exchange Rate - Exports and Imports are hugely affected by the prevailing exchange rate and thus, by extension, impact the current account. An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit. On the other hand, an undervalued currency boosts exports and makes imports more expensive, thus increasing the current account surplus or narrowing the deficit.
During periods of economic uncertainty, a nation with persistent current account deficits comes under increased investor scrutiny and its currency is prone to speculative attacks. This creates a vicious circle in which foreign exchange reserves are depleted to support the domestic currency. This, in addition to a deteriorating trade balance puts further pressure on the currency forcing nations to take stringent measures to support the currency by raising interest rates and restricting currency outflows.
A nation's current account records its transactions with the rest of the world - specifically its net trade in goods and services, net earnings on cross-border investments, and its net transfer payments over a defined period of time. A positive current account balance (surplus) indicates the nation is a net lender to the rest of the world, while a negative current account balance (deficit) indicates that it is a net borrower from the rest of the world. A current account surplus increases a nation's net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount.
Factors impacting the Current Account:
- Trade Balance - During a strong economic expansion, import volumes typically surge. However, if exports do not grow proportionately, the current account deficit widens. Conversely, during a recession, the current account deficit shrinks if imports decline and exports increase.
- Exchange Rate - Exports and Imports are hugely affected by the prevailing exchange rate and thus, by extension, impact the current account. An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit. On the other hand, an undervalued currency boosts exports and makes imports more expensive, thus increasing the current account surplus or narrowing the deficit.
During periods of economic uncertainty, a nation with persistent current account deficits comes under increased investor scrutiny and its currency is prone to speculative attacks. This creates a vicious circle in which foreign exchange reserves are depleted to support the domestic currency. This, in addition to a deteriorating trade balance puts further pressure on the currency forcing nations to take stringent measures to support the currency by raising interest rates and restricting currency outflows.
SUBJECT Variables
ANNUAL BALANCE
Positive balance indicates a surplus and negative balance indicates a deficit
- India's current account deficit moderated to USD 23.2 billion in 2023-24 from USD 67 billion a year earlier on the back of lower merchandise trade deficit. This effectively means that India was unable to offset its payments obligations for imports and cross-border investments through its own exports and foreign inflows.
- Barring 2020-21, India has reported a current account deficit since 2013-14 due to a combination of factors - imports being higher than exports, an overvalued currency which in turn makes imports cheaper and exports less competitive, higher payments for overseas investments than investment inflows into the country, etc.
Positive balance indicates a surplus and negative balance indicates a deficit
Goods or Trade balance: Net imports of goods, excluding exports.
- International trade in 2023-24 resulted in a deficit of USD 242.1 billion - an 8.8% drop from USD 265.3 billion a year ago.
Services: Net imports of services (non-goods), excluding exports.
- The surplus in non-trade (services) increased by 13.6% to USD 162.8 billion in 2023-24, from USD 143.3 billion a year ago.
Primary Income: This is the net flow of profits and dividends from investments in other countries, and net remittance flows from migrant workers.
- Primary income deficit in 2023-24 increased by 8.4% to USD 49.8 billion, from USD 45.9 billion a year ago.
- Net FDI (Foreign Direct Investment) inflows in 2023-24 were USD 9.8 billion compared to USD 28 billion a year ago.
- Net FPI (Foreign Portfolio Investment) recorded a net inflow of USD 44.1 billion in 2023-24 compared to an outflow of USD 5.2 billion a year ago.
- In 2023-24, there was an accretion of USD 63.7 billion to foreign exchange reserves (on BoP basis)
Secondary Income: This is the net income generated by Indians via foreign trade after adjusting for all taxes and refunds.
- Secondary income resulted in a surplus of USD 105.9 billion in 2023-24, a 4.9% increase from USD 100.9 billion in 2022-23.
- As per the statement by RBI, net invisible receipts in 2023-24 were higher than a year ago primarily due to services and transfers.
QUARTERLY BALANCE
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