Why in news
India's current account deficit (CAD) for Q2 of 2024-25 moderated slightly to $11.2 billion, or 1.2% of GDP, compared to $11.3 billion (1.3% of GDP) a year ago.
Merchandise trade deficit increased to $75.3 billion from $64.5 billion in Q2 of 2023-24
Net services receipts rose to $44.5 billion, driven by growth in computer, business, travel, and transportation services exports.
Foreign Direct Investment (FDI) recorded a higher outflow of $2.2 billion compared to $0.8 billion in the same period last year
What is current account deficit (CAD) ?
CAD is when the value of a country's imports of goods and services is greater than its exports.
CAD and fiscal deficit together make up twin deficits that can impact the stock market and investors.
Fiscal Deficit is the gap between the government’s expenditure requirements and its receipts. This equals the money the government needs to borrow during the year.
Implication:
The CAD is significant because it affects the economy, stock markets, and people's investments.
A lower CAD can boost investor sentiment and make the country's currency more attractive to investors.
A surplus in the current account indicates that money is flowing into the country, which can boost foreign exchange reserves and the value of the local currency.
Negative Effects of CAD on Economy:
When a country's imports exceed its exports, it can cause a decrease in demand for its currency, leading to a weaker currency value (depreciation).
This can make imports more expensive, leading to higher inflation and a reduction in purchasing power.
If a country is unable to finance its current account deficit with foreign investment, it may need to borrow to cover the gap.
This can lead to an increase in debt levels, which can further harm the economy.
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