Balance of Payments

BoP has two major accounts: the Current Account, which records trade in goods (visible items), services (invisible items like software exports, tourism), and income/transfers; and the Capital Account, which records transactions affecting a country's assets and liabilities abroad, like foreign investment and loans.

The Current Account splits further into the Balance of Trade (exports minus imports of goods only) and the broader Current Account Balance (which also includes services and transfers). India typically runs a trade deficit but narrows it through strong services exports, like IT, and remittances.

In principle, the overall BoP always balances (credits = debits), because any current account deficit must be financed by a capital account surplus (borrowing or selling assets) or a draw-down of foreign exchange reserves — it is the current account balance that signals whether a country is a 'net borrower' or 'net lender' to the world.

Within the Capital Account, economists distinguish autonomous transactions (undertaken for their own sake — profit, business, or personal reasons, such as FDI or portfolio investment) from accommodating transactions (undertaken specifically to cover a gap left by autonomous transactions, such as the RBI drawing down or adding to foreign exchange reserves). This distinction is what allows a 'Balance of Payments deficit' to be a meaningful concept even though the BoP, taken as a whole including accommodating items, always balances by accounting construction.

Foreign exchange reserves — gold, foreign currency assets, and Special Drawing Rights held by the RBI — act as the country's buffer for accommodating transactions. A sustained current account deficit financed by depleting these reserves (rather than by capital inflows) is a warning sign of external vulnerability, which is why analysts watch India's reserve levels alongside the current account deficit figure itself.