The capital account
What is paying for the deficit, and how quickly it could leave. In August 2026 India took in US$50.6 billion of capital in a single month — and the composition of it is a more interesting story than the total.
Chapter 4 · Advanced · Updated 3 November 2026
Chapter 3 ended by saying the financing matters more than the deficit. This is the financing.
Sticky and hot
The single most useful way to sort capital flows is by how fast they can reverse.
Foreign direct investment is an ownership stake in a business — a factory, a subsidiary, a controlling holding. Selling it takes months and a buyer. FDI is the stickiest money a country can attract, and a deficit financed by it is comfortable.
Foreign portfolio investment is shares and bonds bought on an exchange. It can leave in a morning, and it tends to leave when everybody else is leaving, which is precisely when a country can least afford it.
External commercial borrowings are loans from abroad, with maturities. They do not leave early, but they do have to be repaid or refinanced, and refinancing depends on conditions at the maturity date rather than at the borrowing date — chapter 12 of the company analysis subject made this point about a single company, and it is the same risk at national scale.
Short-term credit is trade finance and similar. It rolls over continuously, which makes it reliable until the moment it stops.
Banking capital includes non-resident deposits and the foreign assets and liabilities of banks. Deposits can be withdrawn, though non-resident deposits are typically stickier than portfolio flows.
The ordering is roughly: direct investment, then long borrowings, then deposits, then short-term credit, then portfolio flows. The further down a country's financing sits, the more a bad week matters.
India's capital account, August 2026
In US dollars billion, from the release of 15th October 2026:
| August 2025 | August 2026 | |
|---|---|---|
| Foreign direct investment (net) | −0.1 | +3.3 |
| Foreign portfolio investment (net) | −2.6 | +1.7 |
| External commercial borrowings (net) | −0.1 | −22.4 |
| Short-term credit to India (net) | +0.2 | +0.2 |
| Banking capital (net) | −4.7 | +64.7 |
| of which: NRI deposits (net) | +1.0 | +83.0 |
| Other capital (net) | +7.8 | +3.0 |
| Capital account (net) | +0.5 | +50.6 |
A capital account that was essentially flat a year earlier took in US$50.6 billion in a single month. That is an extraordinary figure and the composition explains it.
The line that exceeds its own parent
Look carefully at banking capital: +64.7, of which NRI deposits +83.0.
A component larger than the total it sits inside is not a misprint. It means the rest of banking capital was −18.3 — other banking flows went out while non-resident deposits came in.
So the honest description of that month is not "banks took in 64.7". It is: non-resident Indians put in 83.0 billion dollars, and about 18.3 billion of other banking capital left at the same time.
That is a much more specific thing to have noticed, and it came from one subtraction on a line most readers skip. The exercise asks you to find it because the "of which" rows in official tables are where the actual events usually are.
The other half of the month
The second striking line is external commercial borrowings at −22.4, against −0.1 a year earlier.
Break it into its own parts, which the release gives: borrowings to India were +1.6, and borrowings by India were +23.9. The second line is Indian entities lending or placing money abroad.
So in the same month that non-resident deposits surged in, Indian entities moved a comparable amount out through the external borrowing account. The headline capital account surplus of 50.6 is a net of two very large gross flows going opposite ways.
Gross flows matter independently of net flows. A country where 83 billion comes in and 40 billion goes out is in a different position from one where 43 billion comes in and nothing leaves, even though the net is identical. Large gross flows mean a lot of money is making decisions, and decisions can change.
What a month like that signals
Be careful here, because this is where analysis turns into storytelling.
What the table establishes: an exceptionally large non-resident deposit inflow, a large offsetting outflow through other banking and external borrowing channels, a modest recovery in portfolio investment from negative to +1.7, and steady direct investment of +3.3.
What the table does not establish: why. A surge in non-resident deposits of that size is consistent with attractive deposit rates, with a weak rupee making rupee deposits cheaper to fund from abroad, or with a specific policy measure — and the balance of payments release says nothing about which. It is an accounting record, not an explanation.
Chapter 6 reads the Reserve Bank's own October announcements, which is the nearest available evidence about what the authorities were responding to. Even there, the right discipline is to report what the documents say and mark the gap where they are silent.
The connection to chapter 3, across time
The sentence worth carrying out of this subject.
A capital inflow today is an income outflow for ever. Every dollar of foreign direct or portfolio investment accepted will pay dividends, profits or interest to its owner in future years, and those payments appear in the current account as income — the line chapter 3 found was actually producing India's deficit.
So the two accounts are not independent. A country that funds current account deficits with capital inflows is, over time, building the income outflow that widens future current account deficits. That is not an argument against foreign investment, which brings capital, technology and markets. It is the reason the income line grows steadily and why chapter 3's finding was structural rather than a one-year accident.
The cumulative figures make the scale plain: April to August 2026 took in +76.3 on the capital account against +12.0 a year earlier, more than six times as much, while the income outflow ran at −24.8 for the five months.
The point
The capital account records what is financing the current account deficit, and the composition matters more than the total because flows differ enormously in how fast they can reverse — direct investment is a factory, portfolio investment is a keystroke. India took in US$50.6 billion in August 2026, driven by non-resident deposits of 83.0 within a banking capital line of 64.7, which means 18.3 of other banking capital left simultaneously. External commercial borrowings were −22.4 on gross flows of 1.6 in and 23.9 out. And every capital inflow becomes a permanent income outflow in the current account, which is why chapter 3's deficit is structural.
Check yourself
4 questions. Every answer is explained afterwards, including the ones you get right — guessing correctly is not the same as knowing. Score 70% or more and the chapter is marked done.
Question 1 of 4
0 of 4 answered. You can submit with questions unanswered — they simply score zero.
Now do it with your own numbers
From the latest balance of payments release, list every capital account component with its figure for the month. Sort them by how quickly you think each could reverse — a day, a quarter, a decade — and say what you based each judgement on. Then find the one component whose "of which" line is larger than the component itself, work out what that implies about the rest of the component, and say whether it changes how you read the total.
Direct investment is a factory; portfolio investment is a keystroke. For the second part, an "of which" item can exceed its parent only if the other things inside the parent are negative, which is itself a finding rather than a misprint.
Who published this
Published by FreeFinance, an independent financial education project. How these chapters are written and checked. Nothing here is investment advice.