Question

Unfavourable balance on current account leads to high receipts of foreign exchange in the capital account. Do you agree?

Answer 1

Unfavourable balance on current account leaves us with no option other than (i) borrowings from rest of the world, or (ii) selling our assets to rest of the world. Either way, it leads to the receipt of foreign exchange in the capital account. However, these receipts are only adding to our liability to the rest of the world or reducing our ownership of assets vis-a-vis rest of the world.