CA Foundation · Business Economics · International Trade
A persistent current account deficit in India's balance of payments is most directly financed by:
A current account deficit is financed by net capital account inflows, such as foreign investment and borrowing, or by drawing down foreign exchange reserves. Because the balance of payments must balance, the foreign exchange shortfall from the deficit has to be covered by these sources.
- AA fall in imports caused by the deficit itself
- BNet inflows on the capital account or drawing down foreign exchange reservesCorrect
- CAn increase in the country's merchandise exports in the same period
- DA rise in the tariff rates on imports
Explanation
The balance of payments must balance in accounting terms. A current account deficit means a net outflow of foreign exchange, which must be matched by capital inflows such as FDI, portfolio investment or borrowing, or by using reserves. Higher exports or tariffs would reduce the deficit rather than finance it.
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