7 reasons why India is staring at a currency crisis

The Indian economy is in a dangerous position today and the situation can potentially spiral out of control. Here's how.

A current account deficit occurs when a country is importing more goods and services than it is exporting (if the reverse was true, it would be in a surplus). India's current account deficit has exploded 1125 per cent since 2007, going from $8 billion to $90 billion. In other words, India is importing $90 billion more than it is exporting.

However, in 2007, India had $300 billion in foreign exchange reserves. It could cover its current account deficit 37.5 times over. Currently, India's foreign exchange reserves have gone down to $275 billion: it can only cover its current account deficit 3 times.

India's current account deficit has grown steadily throughout the past 5 years: it did not just balloon up overnight. Since many of the countries that trade with India only accept foreign currencies in return (mainly the greenback), it would seem obvious for India to continuously maintain a growing stockpile of foreign reserves through the years; alas, India did not do that. It's no wonder that Prime Minister Manmohan Singh tried to reassure the country that unlike 1991 when "the country only had foreign exchange reserves for 15 days of imports.... now we have reserves for seven months". 7 months before we run out of reserves? That hardly sounds