Relevance: GS-3 (Indian Economy – BoP, Exchange Rate); Source: The Hindu, RBI, Economic Data

Context

Recent data shows a sharp decline in net foreign capital inflows into India even as the current account deficit (CAD) remains contained, contributing to a steady depreciation of the rupee.

India’s Balance of Payments: The Current Picture

• CAD trends: India historically runs a CAD due to a persistent goods trade deficit. Only four years since 2000 have seen a surplus.
  
• 2024–25 (Apr–Sep): CAD ~ $8.6 billion, despite strong invisibles (software exports, remittances).
  
• Goods deficit: Continues above $300 billion, but partly offset by robust services exports.
  

FDI Outflow: The Key Concern

India is now witnessing a capital account stress rather than a current account problem.

What the data shows

• Net foreign capital inflows fell to $5.1 billion (Apr–Sep 2025) from $34.6 billion in the same period of 2024.
  
• Foreign investment in rupee terms fell sharply because of rupee depreciation (₹84 → ₹90).
  
• FDI equity inflows dropped to $10.2 billion in 2023–24, compared to $43 billion in 2019–20.
  
• Firms and investors are preferring reinvested earnings and domestic borrowings rather than bringing fresh capital.
  

Why is capital leaving?

• Global factors: Strong US dollar, high US interest rates.
  
• Domestic factors:
  
  • Lower return expectations in some sectors
    
  • Investors waiting for more stability in the rupee
    
  • Preference for safer global assets due to global uncertainty

Implication for the Rupee

Even a modest CAD becomes hard to finance when capital inflows dry up, putting downward pressure on the rupee. Thus, rupee depreciation today is more a capital account story than a CAD story.

Q. Consider the following statements about India’s Balance of Payments (BoP):

1. India’s current account has remained in surplus for most years since 2000.
   
2. A fall in FDI inflows can weaken the rupee even without a rise in the Current Account Deficit.
   
3. Rupee depreciation automatically improves India’s capital account balance.
   

Which of the above statements is/are correct?
A. 2 only
B. 2 and 3 only
C. 1 and 2 only
D. 1, 2 and 3

Correct Answer: A (2 only)