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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 ( ECBs ), 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 4 currencies namely, Dollar, Euro, Pound and Yen.
    • SDRs are being maintained in the accounts of IMF ( International Monetary Fund ) to meet the international obligations.
    • India has Forex reserves of $424.55 billion as on March 2018 and ranks 8th in the world in terms of Foreign Exchange Reserves.