The Current Account Deficit (CAD) may drop to 3% this fiscal year

In contrast to the minimum consensus forecast of 3.5%, the SBI has estimated a reduced current account deficit for this fiscal year of 3%, citing increased software exports, remittances, and a likely $5 billion increase in foreign exchange reserves from swap arrangements.

Current Account Transactions

It’s crucial to comprehend the current account transactions in order to fully comprehend the current account deficit.

Transactions involving current accounts demand foreign currency.

transactions that follow, together with which component they are a part of:

Component 1 : Payments connection with Foreign trade – Import & Export

Component 2 : Interest on loans to other countries and Net income from investments in other countries

Component 3 : Expenses associated with foreign travel, education, and medical care for parents, spouses, and children as well as remittances for the living costs of parents, spouses, and children who are living abroad.

SBI’s take

  • The largest influence on CAD comes from oil imports, which account for up to 30% of the nation’s import bills.
  • The CAD is affected by every $10 increase in petroleum prices by a factor of 40 bps, whereas the same increase in fuel inflation is 50 bps and causes a 23 bps drop in growth.
  • In the June quarter, robust remittances and software exports reduced CAD by 60 basis points (bps).
  • As swap transactions reverse, the currency reserves, which have fallen from $642 billion in September 2021 to approximately $531 billion last week, are anticipated to increase by $5 billion.
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