Current account (balance of payments)

Also called: Current account, BoP current account · Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 6 "Open Economy Macroeconomics"

Meaning

The current account is the part of the balance of payments (BoP) that records a country's trade in goods, trade in services, primary income (wages, interest, dividends and profits earned across borders) and secondary income (transfers such as remittances, gifts and grants) with the rest of the world over a period, usually one year.

It shows whether a country earns more from the world than it spends, which makes it a lender, or spends more than it earns, which makes it a borrower. A large deficit that is badly financed can lead to a BoP crisis, as it did in India in 1991.

Formula: Current account balance (CAB) = Balance of trade (BoT) + net invisibles

Also: CA = S − I (national saving minus domestic investment)

Explanation

How it is recorded

• Balance of payments (BoP): a record of all transactions between a country's residents and the rest of the world.

• A resident is a person or firm whose main economic interest is in the country. Citizenship does not decide it.

• Double entry: every transaction is written down twice.

• Credit (+): money comes into India. Examples are exports and remittances received.

• Debit (−): money goes out of India. Examples are imports and dividends paid to foreign investors.

• Because of double entry, the whole BoP always balances. A "deficit" or "surplus" always refers to one part of it, such as the current account.

• It is called "current" because these flows are about income and spending today. They create no claim that must be repaid later. That is the difference from the capital account.

Its components

• 1. Balance of trade (BoT) = goods exports − goods imports.
• It covers goods only.

• When imports are greater than exports, the country has a trade deficit.

• 2. Invisibles. Nothing physical crosses the border or passes through customs.

• Non-factor services: shipping, banking, insurance, tourism and software.
• Income (primary income): payments to factors of production. These are compensation of employees (wages), interest, dividends and profits.
• Transfers (secondary income): receipts for which nothing is given in return, such as gifts, grants and remittances (money that citizens working abroad send home).

• Net invisibles = invisible receipts − invisible payments.

• NCERT vs BPM6:

• NCERT Class 12 loosely counts factor income as part of "trade in services".
• The IMF's BPM6 (Balance of Payments Manual, 6th edition, the global standard) uses four headings: goods, services, primary income and secondary income.
• RBI follows BPM6.

Worked example (NCERT Table 6.1, US$ million)

Item	Value
Exports (goods)	150
Imports (goods)	240
Trade balance	−90
Non-factor services	30
Income	−10
Transfers	32
Net invisibles	52
Current account balance	−38

• Step 1: Trade balance = 150 − 240 = −90.
• Step 2: Net invisibles = 30 + (−10) + 32 = 52.
• Step 3: CAB = −90 + 52 = −38. This is a current account deficit (CAD) of 38.
• NCERT trap: the table labels the trade balance "[2 – 1]". The correct working is row 1 − row 2, which is exports − imports = −90.

Surplus, deficit and what moves it

• Current account surplus: receipts are greater than payments. The country builds up claims on the rest of the world, so it is a lender.
• Current account deficit (CAD): receipts are less than payments. The country is a borrower.
• A CAD must be financed in one of two ways:
• a capital account surplus, meaning foreign investment or loans come in, or

• running down forex reserves, meaning the RBI spends its stock of foreign currency.

• The saving-investment link: CA = S − I

• A CAD means I > S. The country invests more than it saves, and foreign savings fill the gap.
• Example: GDP = ₹100 lakh crore, S = ₹30 lakh crore, I = ₹32 lakh crore.

• CA = 30 − 32 = −₹2 lakh crore, which is a CAD of 2% of GDP.

• What widens the CAD:

• Oil price rise: the import bill rises directly, and the CAD widens.

• High inflation or uncertainty: people buy more gold as a safe store of value. Gold imports rise, and the CAD widens.

• What narrows the CAD:

• higher services exports and remittances
• more household saving or a lower fiscal deficit, which raises S

In India

• Who measures it: the RBI publishes quarterly BoP data. Its current account table follows BPM6: goods, services, primary income and secondary income.
• Latest CAD:
• 2025-26: US$ 25.2 bn (0.6% of GDP) [2]
• 2024-25: US$ 22.9 bn (0.6% of GDP) [2]

• Record: 4.8% of GDP in 2012-13

• A huge goods gap, mostly covered by invisibles:

• The merchandise trade deficit was US$ 337.3 bn in 2025-26, up from US$ 286.9 bn in 2024-25 [2].
• Net invisibles in 2025-26 were therefore about +US$ 312 bn (−25.2 − (−337.3)).

• Invisibles covered roughly 93% of the goods gap.

• Services: net services receipts were US$ 60.4 bn in Q4 (Jan-Mar) 2025-26, up from US$ 53.3 bn a year earlier [2].

• The main drivers are software, business services and global capability centres (GCCs), which are offshore units of multinational companies located in India.

• Primary income is a net outflow, because foreign investors take home interest and profits.

• Net outgo was US$ 12.8 bn in Q1 2025-26 [3] and US$ 11.1 bn in Q4 2025-26 [2].

• Remittances: India is the world's largest remittance recipient, with US$ 135.4 bn in FY25 [4].

• Personal transfer receipts were US$ 43.5 bn in Q4 2025-26, up from US$ 33.9 bn in Q4 2024-25 [2].

• Quarterly swings:

• Q1 2025-26: a CAD of US$ 2.4 bn (0.2% of GDP) [3]

• Q4 2025-26: a surplus of US$ 7.1 bn (0.7% of GDP) [2]. Services exports and remittances usually peak in Q4.

• How it was financed: forex reserves fell by US$ 23.6 bn in 2025-26 on a BoP basis [2].

• Comfort zone: a CAD of about 2.5-3% of GDP is widely seen as safe. India's recent CAD is well inside this limit.

Don't confuse with

• Balance of trade: covers goods only. The current account adds services, income and transfers.
• Capital (financial) account: records trade in assets (FDI, FPI and loans), which creates claims that must be repaid or serviced later. The current account creates no such claim.
• Remittances vs services: remittances are transfers (secondary income). They are not services, and they are not part of the capital account.
• Current account deficit vs fiscal deficit: a CAD is a gap between the nation and the rest of the world (I > S). The fiscal deficit is the government's gap between its spending and its non-borrowed receipts. The two are linked through S, but they are different measures.

Prelims Hooks

• CAB = BoT + net invisibles. Invisibles = services + income + transfers.
• BPM6 labels: factor income = primary income; gifts, grants and remittances = secondary income.
• CA = S − I. A CAD means I > S, so the country is a net borrower from the world.
• Balance of trade excludes services. A question that counts software exports in BoT is a trap.
• India's CAD: US$ 25.2 bn (0.6% of GDP) in 2025-26 [2]. The record is 4.8% in 2012-13.
• India is the world's largest remittance recipient: US$ 135.4 bn in FY25 [4]. Primary income is a net outflow for India [2][3].

Mains Points

• The CAD is structural but manageable.
• India's goods deficit was US$ 337.3 bn in 2025-26, yet the CAD stayed at 0.6% of GDP because of services and remittances [2].
• Both supports are exposed to global slowdowns, AI automation and visa or migration rules in host countries.

• Growing goods exports, for example electronics under PLI (the Production Linked Incentive scheme), reduces reliance on them.

• Oil and gold are the weak points.

• Oil: India imports more than 80% of its crude, so price shocks pass straight into the CAD. Renewable energy and ethanol blending cut oil imports.
• Gold: demand rises with inflation and uncertainty. Sovereign Gold Bonds and gold monetisation cut gold imports.

• The 2012-13 CAD of 4.8% came from high oil prices and a gold import boom. The government responded by raising the import duty on gold.

• How a CAD is financed matters as much as its size.

• Stable FDI is safe financing. Volatile FPI and short-term debt are risky.
• 1991: large CADs had been financed by short-term borrowing. Reserves fell to about two weeks of imports, which forced devaluation and the 1991 reforms.
• Seen through CA = S − I, a moderate CAD that funds productive investment can help growth. Raising household saving and cutting the fiscal deficit narrows the gap without slowing growth.

Related concepts

• Balance of payments
• Balance of trade
• Trade deficit
• Invisibles
• Non-factor services
• Income account (balance of payments)
• Remittances
• Current account deficit

Read more

• Balance of payments I: the current account