What is Balance of Payments?

The BoP is India's ledger of all economic transactions with the rest of the world. Every time foreign currency is earned or spent — through trade, investment, or transfers — it gets recorded here. It has two main accounts:

Current Account — tracks day-to-day transactions:

• Trade (Goods) — merchandise exports minus imports. India runs a persistent deficit driven by crude oil imports (80%+ of oil is imported).
• Services — IT/software, consulting, travel, financial services. India's large surplus here partially offsets the goods deficit.
• Primary Income — returns on foreign investments (dividends, interest). India is a net payer since foreign investment in India exceeds the reverse.
• Transfers — personal remittances from the Indian diaspora. India is the world's largest remittance recipient (~$120B/year).

The non-goods items (services + income + transfers) are collectively called "Invisibles".

Capital & Financial Account

Records cross-border investment flows that finance the current account deficit:

• FDI — long-term investment (10%+ ownership stake). Stable capital, often with technology transfer.
• FPI — portfolio investment in stocks and bonds. Volatile "hot money" that can exit quickly during global risk-off events.
• Other — banking capital, trade credits, external commercial borrowings (ECBs), loans.

Why It Always Balances

A current account deficit must be financed by capital inflows — the BoP always nets to zero. When foreign inflows exceed the deficit, the RBI absorbs the surplus by purchasing forex, adding to its reserves and preventing sharp rupee appreciation. Conversely, when capital flees (e.g., global risk-off), the RBI sells reserves to cushion the rupee's fall.

Total Change in Forex Reserves = the balancing item. A negative value means reserves grew (RBI was a net buyer of foreign currency).