THE DYNAMICS OF CURRENT ACCOUNT IMBALANCES AND THEIR EFFECT ON INDIA'S DEBT AND EXCHANGE RATES

Current Account is an important component of Balance of Payment which represents country’s foreign transactions. A Current Account Deficit indicates negative sales abroad. A country undergoing Current Account Deficit results into foreign liabilities and debts with rest of world. This further leads to payback of valuable foreign exchange reserves. Substantial amount of foreign exchange are spent on paying out these debts. One important drawback of increasing external debt is decline in value of nation’s domestic currency. Payment of foreign debts results in increase in demand of foreign currencies. This leads to devaluation of domestic currency and thus, enhances problems of foreign exchange crises. There are various factors which influence country’s External Borrowings as well as Foreign Exchange Rates. One such important factor is Current Account (Trade Balance) Deficit. There is a need to study the impact of Current Account Deficit of India on its External Borrowings as well as on Foreign Exchange Rates. The present study tries to study trend of India’s Current Account Balance and External Debt of India over a period of two decades i.e. from 1990 – 91 to 2012 –13. Study also covers analysis of components of India’s Total External Debt that includes long term debt and short term debt. Finally, study determines correlation between India’s Current Account Balance with External Debt, its components, and selected Foreign Exchange Rates that includes US Dollar, Pound Sterling, and Japanese Yen & Euro Dollar