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,
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.