Impact of Indias Current Account Deficit and National Debt on Its Foreign Exchange Rate (vs. Us$): A Study of India from 1990-2018

Abstract

Abstract: The Current Account Deficit and National Debt of a country are two major factors that can impact the foreign exchange rates it has with the currencies of other nations. This study empirically analyses the impact of India’s Current Account Deficit (in million USD) and National Debt (in million USD) on the nation’s Foreign Exchange Rate (vs.US$). The Current Account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest, and dividends. A deficit in the current account shows that the value of the goods and services it imports exceeds the value of the products it exports. In other words, the country requires more foreign currency than it receives through sales of exports, and it supplies more of its owncurrency than foreigners demand for its products. The excess demand for foreign currency lowers the country's exchange rate (exchange rate depreciation). Thus the model presents a negative or inverse relation between Current Account Deficitand its impact on the Foreign Exchange Rate. Government debt is public debt or national debt owned by the central government. A country with increasing government debt is less likely to acquire foreign capital, leadingto inflation. Foreign investors will sell their bonds in the open market if the market predicts government debt within a certain country. As a result, a decrease in the value ofits exchange rate will follow