Explanation – The current account deficit reflects the difference between a country’s total value of imported goods, services, and investments and the value of its exported goods, services, and investments. When a country reduces its current account deficit, it means that the gap between its imports and exports is narrowing, leading to a more balanced trade situation. A reduced current account deficit can help stabilize the country’s currency in several ways:

• Less pressure on the currency: A large current account deficit can put downward pressure on the currency as it indicates that the country is spending more on imports than it earns from exports. Reducing the deficit can ease this pressure and support the currency’s value.
• Improved investor confidence: A lower current account deficit signals that the country’s economic situation is improving, which can attract foreign investment. This increased demand for the country’s currency can further strengthen it.
• Reduced risk of a balance of payments crisis: A large current account deficit can lead to a balance of payments crisis if the country struggles to finance its imports and service its external debt. Reducing the deficit can help mitigate this risk, contributing to currency stability.

Source: The Hindu