{"id":76905,"date":"2025-12-08T11:55:30","date_gmt":"2025-12-08T06:25:30","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=76905"},"modified":"2025-12-08T11:55:30","modified_gmt":"2025-12-08T06:25:30","slug":"why-the-rupee-is-falling-indias-capital-account-crisis-explained","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/why-the-rupee-is-falling-indias-capital-account-crisis-explained\/","title":{"rendered":"Why the Rupee Is Falling: India\u2019s Capital Account Crisis Explained"},"content":{"rendered":"<h2><b>Capital Account Latest News<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India has a long-standing problem with its <\/span><b>current account deficit<\/b><span style=\"font-weight: 400;\"> (CAD) \u2014 the part of the balance of payments that tracks what the country earns from the world versus what it pays out.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In the last 25+ years, India has recorded a current account surplus only four times: 2001\u201302; 2002\u201303; 2003\u201304; 2020\u201321.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Every other year, India imported more goods and services than it exported, leading to a deficit.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The CAD hit record highs of $78.2 billion in 2011\u201312 and $88.2 billion in 2012\u201313.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In most years since then, it stayed below $50 billion, except in 2018\u201319 ($57.3 billion) and 2022\u201323 ($67.1 billion), when it rose again.\u201d<\/span><\/li>\n<\/ul>\n<h2><b>India\u2019s Current Account: The Role of the Invisible Hand<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The current account in the BOP has two subcomponents. The first is merchandise trade \u2014 exports and imports of physical goods.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The second one is called invisibles subcomponent. The \u201cinvisibles\u201d trade has to do with the global flows of services, people, data and ideas, as opposed to the movement of tangible stuff (\u201cvisible\u201d) across national borders through sea and by air.<\/span><\/li>\n<\/ul>\n<h3><b>Merchandise Trade Deficit Keeps Widening<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India has always imported more physical goods than it exports, leading to a persistent merchandise trade deficit.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Key trends:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">$91.5 billion deficit in 2007\u201308<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Peaked at $195.7 billion in 2012\u201313<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Narrowed to $102.2 billion in 2020\u201321<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Jumped to $286.9 billion in 2024\u201325<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">At the current pace, the 2025\u201326 deficit may cross $300 billion.<\/span><\/li>\n<\/ul>\n<h3><b>Invisibles: The Surplus That Saves India\u2019s Current Account<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India consistently earns <\/span><b>large surpluses<\/b><span style=\"font-weight: 400;\"> here due to:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">High private remittances<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Strong IT and business service exports<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Skilled professional services (finance, design, consulting, medicine, etc.)<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">These surpluses offset India\u2019s payments for:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Interest and dividends to foreign investors<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Royalty payments<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Education of Indians abroad<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3><b>Invisibles Surplus Has Grown Dramatically<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India\u2019s invisibles surplus has risen strongly:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">$75.7 billion in 2007\u201308<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">$150.7 billion in 2021\u201322<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">$263.9 billion in 2024\u201325<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This year, it is likely to exceed <\/span><b>$280 billion<\/b><span style=\"font-weight: 400;\"> \u2014 a new record.<\/span><\/li>\n<\/ul>\n<h3><b>Why India\u2019s CAD Doesn\u2019t Blow Up<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Even though India\u2019s merchandise trade deficit is massive, the invisibles surplus almost balances it out, preventing the current account deficit (CAD) from becoming unsustainable.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This explains why India\u2019s CAD has often remained manageable despite weak goods exports.<\/span><\/li>\n<\/ul>\n<h3><b>India as the \u201cOffice of the World\u201d<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India\u2019s rising invisibles surplus reflects its global economic role:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Just as China is the <\/span><b>\u201cfactory of the world\u201d<\/b><span style=\"font-weight: 400;\">,<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">India has become the <\/span><b>\u201coffice of the world\u201d<\/b><span style=\"font-weight: 400;\">, exporting white-collar skills \u2014 software engineers, accountants, doctors, designers, auditors, and other professionals.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">These service exports act as an economic stabiliser, cushioning the impact of India\u2019s large goods imports.<\/span><\/li>\n<\/ul>\n<h2><b>CAD Is Not the Problem \u2014 Capital Flows Are<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India\u2019s current account deficit (CAD) has actually declined, falling from $25.3 billion (Apr\u2013Sep 2024) to $15.1 billion (Apr\u2013Sep 2025).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Despite this improvement, the rupee has weakened sharply against major currencies.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The real culprit is not the CAD but the <\/span><b>capital account<\/b><span style=\"font-weight: 400;\">, where inflows have dried up.<\/span><\/li>\n<\/ul>\n<h3><b>Rupee\u2019s Slide Driven by Weak Capital Inflows<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Over the past year, the rupee has depreciated significantly against the:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">US dollar (84.73 \u2192 89.92)<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Euro (89.20 \u2192 104.82)<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">British pound (107.76 \u2192 120)<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Yen (0.5658 \u2192 0.5815)<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Chinese yuan (11.66 \u2192 12.72)<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This fall is linked to shrinking foreign investments, not excessive import bills.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Foreign capital inflows hit a record <\/span>$107.9 billion in 2007\u201308<span style=\"font-weight: 400;\">, consistently exceeding the CAD and boosting forex reserves for many years.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">But now:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>2024\u201325:<\/b><span style=\"font-weight: 400;\"> Net capital inflows crashed to <\/span><b>$18 billion<\/b><span style=\"font-weight: 400;\">, lower than the CAD<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>2025\u201326 (Apr\u2013Sep):<\/b><span style=\"font-weight: 400;\"> Only <\/span><b>$8.6 billion<\/b><span style=\"font-weight: 400;\"> of inflows, again below the CAD<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This mismatch is directly pressuring the rupee.<\/span><\/li>\n<\/ul>\n<h3><b>Sharp Decline in Foreign Investment<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Direct and Portfolio Investment Have Both Weakened.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Foreign investment (overall):<\/b><span style=\"font-weight: 400;\"> $80.1 bn (2020\u201321); $21.8 bn (2021\u201322); $22.8 bn (2022\u201323); $54.2 bn (2023\u201324); $4.5 bn (2024\u201325); $3.6 bn (Apr\u2013Sep 2025).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Foreign Direct Investment (FDI):<\/b><span style=\"font-weight: 400;\"> $44 bn (2020\u201321); $38.6 bn (2021\u201322); $28 bn (2022\u201323); $10.2 bn (2023\u201324); Collapsed to $959 million (2024\u201325); Slight recovery in 2025\u201326 (Apr\u2013Sep): $7.7 bn.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Foreign Portfolio Investment (FPI):<\/b><span style=\"font-weight: 400;\"> From 2021\u201322 onward, only one year (2023\u201324) saw net inflows.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Most years recorded massive outflows: \u2013$18.5 bn (2021\u201322); \u2013$5.1 bn (2022\u201323); \u2013$14.6 bn (2024\u201325); \u2013$4.3 bn so far in 2025\u201326.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3><b>Why This Is Surprising Given India\u2019s Growth<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India\u2019s economy has been growing at 8.2% annually (2021\u201322 to 2024\u201325) and 8% in the first half of 2025\u201326 \u2014 a level of growth that should normally attract significant foreign capital.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Yet, paradoxically, foreign investors have pulled back, leaving India with a capital account deficit.<\/span><\/li>\n<\/ul>\n<h3><b>Capital Dry-Up Is the Main Driver of Rupee Weakness<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The rupee\u2019s current slump is not due to rising imports or CAD pressure.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Rather, it is caused by the sharp fall in foreign capital inflows, which reduces dollar availability and weakens the currency.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The capital account, not the current account, is where India\u2019s external vulnerability now lies.<\/span><\/li>\n<\/ul>\n<p><b>Source:<\/b> <strong><a href=\"https:\/\/indianexpress.com\/article\/explained\/explained-economics\/why-the-rupee-has-a-capital-account-problem-10408134\/\" target=\"_blank\" rel=\"nofollow noopener\">IE<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>India\u2019s rupee slide is driven not by the current account deficit but shrinking capital inflows. Understand merchandise deficits, invisibles surplus, weak FDI\/FPI, and capital vulnerabilities.<\/p>\n","protected":false},"author":18,"featured_media":76910,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[4087,60,22,59],"class_list":{"0":"post-76905","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-capital-account","9":"tag-mains-articles","10":"tag-upsc-current-affairs","11":"tag-upsc-mains-current-affairs","12":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/76905","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/18"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=76905"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/76905\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/76910"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=76905"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=76905"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=76905"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}