Question

1) hike in global oil prices can widen the current account deficit (CAD)of india
2) higher CAD can lead to depriciation of the currency
which among the above statements is correct ?

1) only 1
2) only 2
3)both 1 & 2
4)neither 1 & 2

Answer 1

Answer:

3

Explanation:

Answer 2

The correct answer is option 3) or both 1 and 2.

Explanation:

Due to a rise in oil prices globally,the demand for crude oil or petroleum and any goods and services which require oil as a raw material or input in production, will consequently decrease.Now, this will cause a decline in the country's export level thereby widening the already existing Current Account Deficit as exports will decrease further relative to the import level.

As a result of the low global demand of oil and and oil dependent goods and services and a consequent decline in country's export level,the demand for INR or Indian currency will also decrease relative to other currencies leading to a potential depreciation of INR. This possibility can be attributed to the fact that the buyers or consumers in global market will not be willing to hold or demand much of the INR due to a decline in global demand which includes India as well.