Question

Indian Rupee has been depreciating in recent times.

What effect will it have on the CAD?

Answer 1

As a result of depreciation of the rupee, foreign goods become expensive while domestic goods become cheaper. This should lead to a rise in exports and a fall in imports. Accordingly, CAD should improve, But, if we are importing certain essential raw materials (the imports of which cannot be cut), our import bill may swell with the increase in exchange rate. Accordingly, CAD may not improve. In fact, it may deteriorate further.