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IAI Actuarial Core Principles · Business Economics · Balance of payments and exchange rates

A country's current account shows a deficit of ₹500 crore and its capital account (capital transfers) is negligible. Ignoring errors and omissions, which statement must be true?

A current account deficit of ₹500 crore must be matched by a net financial account inflow of about the same size, whether through foreign borrowing, foreign investment or running down reserves, since the balance of payments balances in accounting terms.

  1. AThe financial account must show a net inflow of about ₹500 crore, offsetting the deficit through net borrowing or asset sales to foreigners, including any reserve drawdownCorrect
  2. BThe financial account must show a net outflow of ₹500 crore
  3. CThe overall balance of payments is permanently in deficit
  4. DThe exchange rate must have depreciated by exactly the deficit percentage
  5. Exports must exceed imports of goods

Explanation

The balance of payments always balances in accounting terms, so a current account deficit is matched by a net financial inflow (borrowing, foreign investment, or reserve drawdown). An outflow would enlarge the gap. The exchange rate change is not fixed by the deficit size.

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