Module: General Practice
Q38: "A deficit in the Current Account (CAD) must necessarily be financed by a net surplus in the Capital/Financial Account or a drawdown of Foreign Exchange Reserves."
Is this statement true, and why?
✅ Correct Answer: B
The Balance of Payments Identity states that Current Account + Capital Account + Errors & Omissions + Change in Reserves = 0. If a country imports more than it exports (CAD), it must pay for the excess.
It finds the money either by: Borrowing/Selling Assets: (Capital Account Surplus: FDI, Loans). Using Savings: (Drawdown of Forex Reserves). In FY 2024-25 (Annual Basis), India ran a CAD of approx 0.6% of GDP.
This was financed by strong Capital flows (FPI/FDI), leading to an overall accretion (increase) in Forex Reserves rather than a drawdown.
It finds the money either by: Borrowing/Selling Assets: (Capital Account Surplus: FDI, Loans). Using Savings: (Drawdown of Forex Reserves). In FY 2024-25 (Annual Basis), India ran a CAD of approx 0.6% of GDP.
This was financed by strong Capital flows (FPI/FDI), leading to an overall accretion (increase) in Forex Reserves rather than a drawdown.