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Indian Economy / External Sector

Balance of Payments Position in India

Balance of Payments is an evaluation between receipts and payments of a country in its transaction with rest of the world. It includes both Current Account as well as Capital Account.

Current Account and Capital Account

  • Current Account has two components, namely Balance of Trade (net balance of trade from tangible goods) and Invisibles.

  • Invisibles are inward remittances by migrant workers, export of software services, revenue from tourism, dividend and royalty received on foreign loans, services like insurance, banking and shipping, etc.

  • For India, there remains Current Account Deficit (CAD) from 2004-05 onwards. Current Account Deficit (or Current Account Surplus) is the Sum of Invisibles and Balance of Trade.

  • Capital Account covers external commercial borrowings (ECB), external assistance, foreign investment, capital flow from the country to foreign countries, etc.

  • Since launching of economic reforms in India, there is a significant increase in Balance of Payments situation. Invisibles are showing impressive performance though the Balance of Trade continues to be in adverse condition.

Foreign Exchange Reserves

  • Foreign Exchange Reserves or Forex Reserves are the currency reserves which can be liquidated at the international market.

  • Forex reserves are made up of foreign currency assets and Gold that are held by RBI and SDRs (Special Drawing Rights) that are held by the Government.

  • SDR is not a coin or a currency note but it is based on the basket of 5 currencies namely, US dollar, Euro, UK pound, Japanese yen and Chinese yuan.

  • SDRs are being maintained in the accounts of IMF (International Monetary Fund) to meet the international obligations.

  • India has Forex reserves of $532.7 billion as on 30th, Sept 2022 and ranks 6th in the world in terms of Foreign Exchange Reserves.