Current account balance and exchange rate policy

A country's current account records the value of exports and imports of both goods and services and
international transfers of capital. It is one of the three components of its balance of payments, the
others being the capital account and the financial account. There was a balance of payments
problem back then as perceived internationally and locally. There was an economic crisis and it was
caused by over valuation of currency, the already current account deficit and low investor trust in
the nation and so played role in exchange rate depreciation. There was a large fiscal imbalance.

There was a negative growth in export and this reflected India's null international competitiveness,
with its extremely high inflation rate and the large depreciation of the Asian currencies. Rupee
depreciated as well as there were two major differences between India and the Asian economies.
From September 1998, there has been a boost in East Asian and Southeast currencies. The rupee has
restabilised at around Rs.43/dollar by then.

Current account balance (BOP, in billions)

0
1994 1995 1996 1997 1998 1999 2000
-1

-2

-3

-4

-5

-6

-7

-8

Column1 Current account balance Series 3

Rise in the Trade Deficit during 1995-96 and afterwards:

From the above chart we can refer that India’s trade deficit during 1995-96 was $4.536 billion,
noticeably swelled up from $2.027 billion in the very previous year. Exports however were grown
21.38 % from the last year, which was $31,830 billion (present scenario estimate). The growth rate
as per target was 20 percent but it was higher the very year with 21.4% estimate which is a good sign
for the economy. Import grew over 28.74% from the last year which could be explaining the trade
deficit in this case.