INDIA’S BALANCE OF PAYMENTS
Last week, 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. This was the first time in 11 quarters that India had witnessed a surplus.
SIGNIFICANCE OF TRANSACTIONS ON CURRENT ACCOUNT:
Movements in the current account are closely monitored as they not only impact the exchange rate of the rupee and India’s sovereign ratings, but also because they point to the overall health of the economy.
WHAT IS BALANCE OF PAYMENT?
- 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.
- The BoP matters because it captures the relative demand of the rupee vis-à-vis the demand for foreign currencies (represented in dollar terms).
CONSTITUENTS OF BoP
The table shows the constituents of India’s BoP. The BoP has two main ‘accounts’ —
- Current Account, and
- Capital Account.
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 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).
The table for Q4 shows a net surplus of $25 billion on the capital account.
Lastly, the BoP table always balances through the change in the foreign exchange reserves column.
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.
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