Balance of Payments
I have recently read in an article that “India’s current account deficit widens to 2.8% of GDP in Q1FY23” from the data released by the Reserve bank on India’s Balance of Payments during the same period.
I wanted to learn more about the Balance of Payments, and after doing some research, I found that
Balance of Payments is the difference between all the money entering and exiting a country over a defined period.
Balance of Payments (BOP) can be categorized mainly into 3 accounts:
➡️ Current A/c:
🔻 Trade (Export and Import) of physical goods
🔻 Invisibles: Services- IT, Consulting
🔻 Unilateral Transfers- Aid received/ provided (Sri Lankan crisis aid)
➡️ Capital A/c:
🔻 Foreign Investments- FDI, FII inflows and outflows
🔻 Deposits, Borrowings
➡️ Reserves: Foreign, Exchange reserves
🔻 Gold (Used as a reserve by major countries)
🔻 SDR (Special drawing rights) is an international reserve asset created by IMF and used between central bank transactions, this form of currency doesn’t see fluctuations.
Entries into these accounts are simple inflow-outflow entries, not double entries used in accounting standards. However, the sum of all transactions recorded in the Balance of payments should be zero.
