Context:
Current account deficit narrows to 1.2% of GDP at $10.5 billion in Oct-Dec: RBI.
Current Account vs Capital Account:
| Current Account | Capital Account | |
| Definition | Current Account mainly focuses on recording the export and import of merchandise along with any unilateral transfers that are completed within the year by a country. | Capital Account mainly focuses on recording the trading of foreign assets and liabilities during a year by a country. |
| Implication | Reflects the total net income of a country within a year. Transactions are usually more immediate and visible | Reflects the net change in the ownership of national assets of a country within a year. Not as immediate and invisible as the current account. |
| Components | Export and import of goods and services Investment income Current transfers | Foreign direct investment Portfolio investment Loans by the government of one country to another |
| Balance | If the current account balance is negative, then a country is a net borrower. Similarly, if the account balance is positive, then the country is a net lender. | If there is a surplus in the capital account, it indicates an inflow of money for a country. Similarly, if there is a deficit in the capital account, it indicates an outflow of currency from the country. |
Source: The Indian Express
Previous Year Question
In the context of India, which of the following factors is/are contributor/ contributors to reducing the risk of a currency crisis?
1. The foreign currency earnings of India’s IT sector.
2. Increasing government expenditure.
3. Remittances from Indians abroad.
Select the correct answer using the code given below:
[UPSC Civil Service Exam – 2019 Prelims]
(a) 1 only
(b) 1 and 3 only
(c) 2 only
(d) 1, 2 and 3
Answer: (b)
Explanation:
Statement 2 is not correct. Government expenditure is not likely to reduce currency risks as increase in government expenditure does not directly affect the demand and supply of rupee
