InvestorQ : What could be the likely impact of the trade deficit and the current account deficit widening?
vidhya Laxmi made post

What could be the likely impact of the trade deficit and the current account deficit widening?

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sarah Leo answered.
4 weeks ago
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In last few months, trade deficit was approximately $25 billion per month and that looks set to continue for now. At the current run rate of accretion, the merchandise trade deficit could close FY23 at a level of around $280 to $300 billion. The services sector, in comparison, can at best deliver a surplus of $100 to $130 billion for the current account. However, there would still be a huge gap to fill. What the RBI would really worry about is the fact that a sharply higher current account deficit could have twin effects.

What exactly are these twin effects. Remember a CAD of $180 billion translates into current account deficit (CAD) of 5.2% for FY23. The first impact of a steep CAD gap is that it negatively impacts value of the rupee and that is already evident in the fall to 80/$. In 2013, the rupee weakened by 22% and since March 2022, the rupee has already weakened 8%. INR is the big risk. The second risk is the possible impact on sovereign ratings. Even a change in outlook (not ratings) could be bad for India. CAD could be the big macro story now.

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