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Economy
Mahesh

06/07/24 11:35 AM IST

India’s Balance of Payments

In News
    • Recently,data from the Reserve Bank of India (RBI) showed that India’s current account registered a surplus during the fourth quarter (Jan-Mar) of the 2023-24 financial year.
    Balance of Payments
    • The Balance of Payments (BoP) is essentially a ledger of a country’s transactions with the rest of the world.
    • As Indians trade and transact with the rest of the world, money flows in and out of the country.
    • The BoP shows how much money (shown here in billions of US dollars) went out of the country and how much money came in.
    • All the money coming into the country is marked positive and all the money going out is marked negative.
    • As such, in the BoP table, a minus sign points to a deficit.
    • The BoP matters because it captures the relative demand of the rupee vis-à-vis the demand for foreign currencies (represented in dollar terms).
    • Hypothetically, if there were only two countries in the world, India and the US, every time an Indian wanted to buy an American good or service, or to invest in the US, they would have to hand over a certain number of rupees to first buy the dollars needed to complete that transaction.
    • In the end, the exchange rate would be determined by the relative demand of the two currencies — if Indians demanded more dollars than Americans demanded rupees, the ‘price’ (or the exchange rate) of the dollar relative to the rupee would go up.
    Constituents of BOP
    • CURRENT ACCOUNT: The current account, as the name suggests, records transactions that are of a ‘current’ nature. There are two subdivisions of the current account: the trade of goods, and the trade of services.
    • The trade or merchandise account refers to the export and import of physical goods (cars or wheat or gadgets, etc), which determines the ‘balance of trade’.
    • If India imports more goods than it exports, it is running a trade deficit, which is shown by a negative sign.
    • The second part of the current account is made up by the ‘invisibles’ trade, so called because it refers to trade in services and other transactions that are typically ‘not visible’ in the same way as, say, the trade in cars or chairs or phones is.
    • 'Invisible’ transactions include services (e.g., banking, insurance IT, tourism, transport, etc.); transfers (e.g., Indians working in foreign countries sending back money to families back home); and incomes (such as the income earned from investments).
    • The net of these two kinds of trades is the current account.
    CAPITAL ACCOUNT
    • The capital account captures transactions that are less about current consumption and more about investments, such as Foreign Direct Investment (FDI) and Foreign Institutional Investments (FII). 
    • When there is a BoP surplus — net of current and capital account — implying billions of dollars coming into the country, the RBI sucks up these dollars and adds to its foreign exchange reserves.
    • If the RBI did not do this, the rupee’s exchange rate would appreciate — and undermine the competitiveness of India’s exports.
    Source- Indian Express

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