WHY THE RUPEE FACES A CAPITAL ACCOUNT PROBLEM

NEWS

• India has a structural Current Account Deficit (CAD) issue in its Balance of Payments (BoP).
• In the last 25 years, India recorded current account surpluses only in 2001-04 and 2020-21.
• The rupee’s recent depreciation is primarily due to capital account pressures, not current account deficits.

HIGHLIGHTS

Current Account vs Capital Account

• Current Account: Tracks exports/imports of goods and services, remittances, and income from investments.
• Capital Account: Captures foreign investment (FDI/FPI), commercial borrowings, external assistance, and NRI deposits.
• Difference: Current account reflects trade and transfers; capital account reflects financial inflows and outflows.
• Remittances fall under the current account (invisibles).

Current Account Deficit Trends

• CAD peaked at $78.2B in 2011-12 and $88.2B in 2012-13.
• Merchandise trade is consistently in deficit, e.g., $286.9B in 2024-25.
• Invisible surpluses (software, services, remittances) offset deficits, keeping CAD manageable.

Capital Account Pressures & Rupee Fall

• Net foreign capital inflows fell to $18B in 2024-25, below the CAD of $23.1B.
• Foreign investment dropped sharply: $4.5B in 2024-25 vs $54.2B in 2023-24.
• Despite high GDP growth (~8% in 2025-26), global investors have reduced inflows, causing rupee depreciation.

Implications

• Rupee depreciation reflects reduced foreign capital, not trade deficits.
• Maintaining CAD within limits depends on invisible surpluses and stable capital inflows.
• Policy focus: attracting FDI, boosting exports of services, and monitoring BoP stability.

Key Takeaway: India’s BoP is structurally resilient on the current account due to invisibles, but the capital account shortfall is driving rupee volatility.