Why in the news?
The Reserve Bank of India’s (RBI) Annual Report for 2025-26 revealed that India’s Balance of Payments (BoP) stood at a major deficit of $30.8 billion, marking an alarmingly sharp, six-fold increase over the previous year’s deficit.
Key Findings
- The Deficit Surge: The overall BoP went from a surplus of $63.7 billion in 2023-24 to a deficit of $5 billion in 2024-25, before cascading further to a $30.8 billion deficit in 2025-26 (provisional data up to Dec 31).
- Depletion of Forex: To plug this widening gap, the RBI had to draw directly from India’s foreign exchange reserves, causing a significant dent in national buffers.
Understanding the Double Whammy: Current vs. Capital Account
The sudden collapse of India’s BoP position is driven by structural slippages in both component accounts:
1. Widening Current Account Deficit (CAD)
- Status: Hit a three-year high of $30.2 billion in 2025-26.
- The Core Mechanism: While the physical trade deficit (merchandise) actually improved slightly—dropping to $251.6 billion from $286.9 billion—the surplus from India’s “invisibles” (software, services, and remittances) shrank much faster (falling from $263.9 billion to $221.4 billion).
- Result: The services sector could no longer cushion the trade deficit, causing CAD to expand.
2. Near-Total Collapse of the Capital Account Surplus
- Status: Shrank by an unprecedented 99.5%, collapsing down to a mere $72 million from $16.6 billion the year prior.
- Driven by “Other Capital”: Hit a record deficit of $22.6 billion. This reflects delayed export receipts, advance payments for imports amidst geopolitical friction, and domestic funds being parked abroad.
- Foreign Portfolio Investment (FPI) Flight: Reversing a two-year positive streak, FPIs turned into net sellers, pulling out $4.3 billion more from Indian markets than they put in.
[2014] With reference to Balance of Payments, which of the following constitutes/constitute the Current Account?
1.Balance of invisibles
2.Special Drawing Rights
3.Balance of trade
Select the correct answer using the codes given below;
[A] 1 only
[B] .2 and 3 only
[C] .1 and 3 only
[D] 1, 2 and 3
