June 2023 issue contents
ANALYSING THE IMPACT OF EXTERNAL SECTOR VARIABLES ON CURRENT ACCOUNT DEFICIT (CAD): EVIDENCE FROM INDIA

Dr. Manjinder Kaur, Navpreet Kulaar

Abstract

The present study focuses on exploring the impact of external sector variables such as oil price volatility, exchange rate fluctuations and trade openness on current account deficit (CAD) for Indian economy by employing quarterly data spanning from the 2001Q1 to 2020Q4. ARDL bound testing technique of cointegration has been applied to analyse the behaviour of the CAD. The findings of the study indicate that REER and TO have negative and significant impact on CAD while oil price volatility is positively and significantly associated with CAD. This implies that REER and TO have a favourable impact on current account balance and thus improve the current account balance. On the contrary, oil price volatility worsens the current account balance which is due to the fact that intertemporal approach fails in India. The study suggests that Rupee should be freely convertible, trade should be more liberalised to cover up the losses of the exporters arising out of the price sensitivity. Private saving should be promoted to compensate for the rising oil import bill due to oil price volatility and also oil import should be reduced as far as possible so as to reduce the dependence of economy on oil imports.

Keywords:Current Account, Exchange Rate, Cointegration, Intertemporal Approach.