This paper presents the use of the induction motor current to identify and quantify common faults within a two-stage reciprocating compressor based on bispectrum analysis. The theoretical basis is developed to understand the nonlinear characteristics of current signals when the motor undertakes a varying load under different faulty conditions. Although conventional bispectrum representation of current signal allows the inclusion of phase information and the elimination of Gaussian noise, it produces unstable results due to random phase variation of the sideband components in the current signal. A modified bispectrum based on the amplitude modulation feature of the current signal is then adopted to combine both lower sidebands and higher sidebands simultaneously and hence characterise the current signal more accurately. Based on this new bispectrum analysis a more effective diagnostic feature, namely normalised bispectral peak, is developed for fault classification. In association with the kurtosis value of the raw current signal, the bispectrum feature gives rise to reliable fault classification results. In particular, the low feature values can differentiate the belt looseness from the other fault cases and different degrees of discharge valve leakage and inter-cooler leakage can be separated easily using two linear classifiers. This work provides a novel approach to the analysis of stator current for the diagnosis of motor drive faults from downstream driving equipment.