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Foreign Investors’ Confidence Help India’s Current Account Deficit

Increasing foreign investment into India is expected to play a key role in bridging India’s current account deficit (CAD) this year according to market analysts. In a recent report, global banking major Deutsche Bank AG has stated that foreign direct investment (FDI) into India was over $37.4 billion between the months of April-January.

This trend is likely to result in FDI exceeding previous year’s total of $45 billion, indicating a recovery from the decline seen earlier this year on back of the shock demonetization move and the U.S. tightening its policies. Overseas investment into Indian stocks and bonds has also increased by around $8 billion in 2017.

The improvement in FDI inflows is likely to be welcomed by the Indian government. Though the Indian economy is expected to continue to remain one of the fastest growing economies in the world, prevailing lacklustre domestic investment could hamper its growth.

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India’s sustained drop in private investment is unlikely to recover soon, given the central bank’s shift to a neutral position. Furthermore, with U.S. President Donald Trump indicating the adoption of a protectionist agenda, India’s critical service exports and remittances might see a hit, impacting the CAD.

In a statement, Shilan Shah, Singapore-based economist at Capital Economics said

India’s current account deficit is being financed in large part by foreign direct investment inflows. This is a positive reflection of Prime Minister Modi’s policies to encourage direct investment, and should make India less vulnerable to shifts in global risk appetite

The trade deficit increased to $7.9 billion in the October-December quarter, up from $3.4 billion in the previous quarter according to the latest available data. This was lower than expected, as analysts had predicted a gap of $12 billion. The surprise performance was due to the drop in service exports and remittances from abroad being offset by a lower trade deficit.

India’s current account deficit jumped to a record 4.5 percent in 2013, which forced policy makers to start experimenting and trying several ways to curb it. Finance Minister Arun Jaitley has undertaken a wide swathe of policy changes in order to reduce bureaucratic barriers to FDI. The government now claims that India is one of the most open economies of the world. The landmark goods and services tax which is expected to come into force in July is further expected to improve ease of doing business in India.

India’s foreign exchange reserves went up by over $2.7 billion for the week ending March 17, seeing the largest-ever increase in over five months, to reach $366.7 billion.

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