Abstract. The development in Indian economy brings the question of validity of the twin deficit hypothesis. The main aim of the article is theoretical and empirical analysis of the causal relationship between the budget deficit and the current account deficit in the Indian economy from the period 1990-2013. A co-integration test suggests that both the variables have a long run association between each other and move with each other for a long period of time. The Granger causality test clearly finds the existence of bidirectional relationship between the twin deficit variables. The results indicate that twin deficit hypothesis exists in India as opposed by direction between budget deficit and current account deficit. The study finds the government need to find adequate monetary and fiscal policy for policy variables.

Keywords: current account deficit, budget deficit, co-integration, granger causality.