3 Responses to Current Account Deficit – CAD – How Does It Matter to Me ?

  1. Paul says:

    First question
    How does India secure US dollars form FDI? When a foregin company want to setup a office in India; doesnt it pay locally in Ruppes for all the good and services it procures? How did the indians get US dollars in this case?

    Wouldnt an american company have sold american dollars in the foregin exchane market at home; arrived in India with a bag of rupees and paid for whatever it was completing its FDI in?

    Second question
    How come india; when it has a short fall in dollars to pay for imports; cant sell its own currency in the markets and raise the needed dollars this way. It can print an unlimited amount of its own currency. Yes its own currency would fall in value due to this new prinitg but its it an option?

    Third question
    The indian central bank has several billion dollars on reverse. Can those be used to pay for the imports and cover the trade deficit?

    Final question.
    Why does the deficit have to be financed by foreginers? Can local indians use their savings to pay for any deficit that might arise in any given year.

    Say we export 50 units worth of exports and import 90 units; paying the difference of 40 units with savings we have from previous years? Is this not an option?

    Please help me understand..

    thanks

  2. Paul
    You have brilliant queries. In some of them you have self answered them as well. However, the flow to get $s in India is – Foreign company sends / remits dollars an authorised dealer in India which gives them INR in return. While you could source limited INR outside India, but major supply will be within India. You can look it this way, a Foreign company will buy INR by paying India $s.

    2. India does not get $s automatically. It gets them via export earnings or by capital inflows (FDIs) or loans. So even if India keeps on printing INR, it won’t increase the stock of $s.

    3. Indeed, the existing stock of $s is being used to pay for imports. When an importer or even a holiday maker needs $s to pay for the goods, it goes to a bank which gets the $s from the stock from RBI. But if RBI doesn’t get its $ stock re-filled via exports, then a point will come where there won’t be any $ left for imports resulting in 1991 crises.

    4. No – Deficit needs to be financed via exports or via foreign loans / FDIs. Think this way, your savings are in INR which can not be converted in $s, unless you receive your income in $s. The only way residents can participate in reducing the deficit is by avoiding items which are imported, e.g. Oil, Gold.

  3. Paul says:

    So you are saying:

    1. FDI investors give their US dollars to the RBI central bank and in return they are given INR to invest in India locally.

    2. RBI may print INR; but that still doesnt mean they will get dollars; someone who has US$ would have to want those INR. It is not an automatic right.

    The only way india normally gets US$ is via exports, foregin loans, or FDI.

    India RBI can print all the INR they want; but this doesn’t mean they can get new US$ for those INR.

    Is this all correct?

    Finally many US dollars does the RBI have;

    How many US$ do local people ask for in US dollars from the INR each year for imports?

    How much get replenished via exports, FDI and loans each year?

    Why suddenly are we near a crisis point?

    Thanks
    Paul

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