The Current Account Deficit (CAD) is a core economic concept and a component of a country's Balance of Payments (BoP), which records all international economic transactions. A CAD occurs when the total value of money flowing out of a country for international transactions exceeds the total value of money flowing in. The current account is calculated as the sum of the trade balance (exports minus imports of goods and services), net factor income (like interest and dividends), and net current transfers (like remittances).
The concept is part of the global BoP accounting framework, which is standardized by institutions like the International Monetary Fund (IMF) and the United Nations. Interest in the current account as a primary measure of a country's external position increased after 1973, when major economies abandoned fixed exchange rates.
A CAD works by indicating that a country is absorbing more than it is producing domestically. This deficit must be financed by attracting capital inflows, such as Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI), or by drawing down the country's foreign exchange reserves. The Reserve Bank of India (RBI) calculates India's CAD quarterly.
The CAD is intrinsically connected to the Capital Account, as a deficit in the current account is always offset by an equal surplus in the capital account, ensuring the overall BoP balances to zero. For India, the CAD is primarily driven by a merchandise trade deficit, where imports of goods like crude oil and gold outweigh exports. A large or persistent CAD can lead to pressure on the rupee and foreign exchange reserves.
While the concept remains unchanged, the magnitude of India's CAD fluctuates; for instance, it widened to $13.2 billion, or 1.3% of GDP, in the October–December quarter of 2025-26, up from 1.1% of GDP a year earlier. The RBI generally considers a CAD of around 2.5% of GDP to be manageable for currency stability.