Why the rupee has a capital account problem, Pg16

Key Highlights:

• India has a structural Current Account Deficit (CAD) problem, with surpluses only in 4 fiscal years in the last 25 years.
• The CAD was contained within $50 billion for most years, peaking at $78.2 billion in 2011-12 and $88.2 billion in 2012-13.
• A widening goods trade deficit is offset by surpluses in invisible transactions, such as software exports and remittances.
• The recent depreciation of the rupee against major currencies is due to a drying up of capital flows, particularly foreign investment.

Detailed Insights:

• India's goods trade balance has consistently been negative, with the deficit reaching $286.9 billion in 2024-25, but is offset by invisible transactions.
• Invisible transactions have consistently shown surpluses, reaching $263.9 billion in 2024-25, driven by software exports, business services, and remittances.
• Net foreign capital inflows hit a 16-year low of $18 billion in 2024-25, lower than the CAD of $23.1 billion, putting pressure on the rupee.
• Foreign Direct Investment (FDI) slowed to $959 million in 2024-25, after being at $43 billion in 2019-20, while Foreign Portfolio Investments (FPI) have seen net outflows.
• Despite high GDP growth rates, averaging 8.2% from 2021-22 to 2024-25, foreign capital inflows have not kept pace, contributing to the rupee's depreciation.

Key Concepts Involved:

• Current Account Deficit (CAD): The shortfall when a country's total imports of goods, services, and transfers is greater than its total exports.
• Foreign Direct Investment (FDI): An investment made by a firm or individual in one country into business interests located in another country.
• Foreign Portfolio Investment (FPI): Investment in the financial assets of a foreign country such as stocks or bonds.