Capital Account

Why in news?

India has a structural capital account deficit (CAD) problem in external balance of payments (BOP) transactions.

• BOP (Balance of Payments) – A record of all economic transactions (goods, services, investments, transfers) between a country and the rest of the world over a period.
• 3 components of BOP – Current account, Capital account & Financial account.
  • Current Account – It records trade in goods (visible items) and services (invisible items), includes unilateral transfers like remittances, gifts, and donations.
  • Capital Account – It tracks capital transactions such as purchase/sale of land, property, and fixed assets, includes loans, borrowings, investments, and foreign exchange reserves. It helps to finance deficits in the current account.
  • Financial Account – It records cross-border investments in real estate, business ventures, FDI, and portfolio investments, it shows changes in ownership of assets between domestic and foreign entities.
• Capital Account Deficit (CAD) – A situation where the value of goods, services, and transfers a country imports is greater than what it exports.
• Impact – A persistent CAD can signal a country's reliance on foreign capital, affecting exchange rates and economic stability.
• Role of Capital Inflows – Normally, India finances its CAD through capital inflows -
  • Foreign Portfolio Investment (FPI)
  • Foreign Direct Investment (FDI)
  • External Commercial Borrowings (ECBs)
• When these inflows dry up, the rupee faces pressure because the balance of payments cannot be sustained.
• Current Situation – Foreign capital inflows have sharply declined, especially FPIs, but this is contradictory because India’s GDP growth remains strong, yet investors are pulling back.
• Net Capital Inflows Plunged - Net foreign capital inflows hit a 16-year low of $18 billion in 2024-25, falling below the CAD of $23.1 billion for the same fiscal year.
•  Continued Shortfall - The trend continued in April-September 2025, with only $8.6 billion in net capital inflows against a CAD of $15.1 billion.
• Pressure on Rupee - This imbalance (inflows < CAD) means insufficient dollars are coming in to cover the deficit, creating downward pressure on the rupee.
• Reasons include – Global monetary tightening (higher US interest rates), risk aversion among investors, concerns about India’s external vulnerabilities.

Difference between a Current Account and Capital Account

References

1. Indian Express | Why the rupee has a capital account problem
2. Investopedia | Current vs. Capital Accounts