Straight from the Specialists
(Any opinions expressed here are those of the author and not of Thomson Reuters)
The U.S. dollar is the major currency for international trade. Most countries use it to pay for their imports and also peg the dollar for exporting products and services.
The balance of trade (net import or export) would determine if a country is a net payer or a receiver of dollars. Trade, along with other dollar inflows (portfolio/FII, FDI, inward remittances), determines the overall availability of the international currency for a country to engage itself in the global economy. This also has a bearing on determining the exchange rate of a country’s own currency with that of the dollar.
An account that keeps a tab on the dollar expenses and dollar inflows for a period (normally an accounting year) is commonly known as the ‘current account’. A negative balance amounts to current account deficit (CAD), indicating broadly that the country’s imports exceed exports.
India has been persistently running a CAD. The deficit has widened in recent years as a percentage of GDP and has become a concern for policymakers, economists and global investors.