What Does A High Current Account Deficit Mean To Investors?

India’s CAD to be at 2.6% of GDP in 2018-19. India witnessed a trade deficit of ₹18.02 billion in June 2018 Quarter, highest since November 2014.

Let’s discuss what CAD is and its impact on investor’s sentiments.

What Is CAD?

One of the largest components of a country’s current account is its balance of trade. A CAD can simply represent a country’s negative sales abroad. A CAD is the measurement of a country’s trade, where the value of its imports is greater than the value of its exports.

• Currency Depreciation

CAD and currency value has an inverse relationship. Continued rupee depreciation and surging global oil prices are the main reasons for high CAD. However, the demand for and supply of foreign currency liquidity has an impact on the movement of exchange rates. Imports cause the demand for a foreign currency to go up since you have to pay in the foreign currency. In contrast, exports lead to reduced demand for the foreign currency. As the total value of imports is higher than the total value of exports, there is going to be an adverse impact on exchange rates; leading to rupee depreciation. Currency depreciation has an impact on investor confidence. Continued rupee depreciation makes investor panic and thus impacts indices.

• Rise In Input Cost By Domestic Industries

With the depreciation of the rupee, imports become dearer. This would raise the raw material cost in the manufacturing sector. As the cost of production increases, there will be a rise in the prices of the products. Thus, the company’s stocks will witness a fall, impacting investor sentiments. Click here to read about the impact of price movements of raw materials on a company’s profitability.

• Market Sentiments And The Economy

IMF and World Bank have estimated positive growth of the Indian Economy; Index of Industrial Production (IIP) has shown signs of recovery. Also, the recent growth in India’s GDP shows that there is nothing wrong with the Indian economy. The recent continuous fall in the rupee’s value and the CAD is due to external factors as well as a sharp jump in the trade deficit (which in turn is due to higher crude import bill). However, they have an indirect impact on investor sentiments as they impact the production cost of many industries. Recently, the government has undertaken steps to underpin the falling rupee value and keep a check on the current account deficit. Read what our Research team says about these measures here.