Karandikars & Associates

BOP Key Components

The balance of payments is a statistical statement that summarizes transactions between residents and nonresidents during a period. It consists of the goods and services account, the primary income account, the secondary income account, the capital account, and the financial account

Under the double entry accounting system that underlies the balance of payments, each transaction is recorded as consisting of two entries and the sum of the credit entries and the sum of the debit entries is the same, barring errors & omissions. To keep the subject simple, we have considered the "Net" position (Credit-Debit), instead of showing both the debit and credit entries

In India, the compilation and dissemination of BoP data is the prime responsibility of RBI. RBI presents such data in US Dollar million as well as in Rs Crore terms

With India now fully integrated into the world economy, we at K&A have a storng preference for presenting everything in USD terms

There are six key components of Balance of Payments (BOP):

I. Merchandise (Exports FOB less Imports CIF gives Trade Balance)

II. Invisibles, Net

III.Current account (Trade Balance + Net Invisibles)

IV. Capital account

V. Overall balance (Current Account + Capital Account)

VI. Monetary movements

The sum of the current account and capital account indicates the overall balance, which could either be in surplus or in deficit. The movement in overall balance is reflected in changes in the international reserves of the country

Except for few years (IMF, net /SDR allocation), Monetary Movements have entirely comprised of increase (-ve number) or decrease (+ve number) in Reserves

There is something called standard presentation of BOP as per BPM6 (6th Edition of Balance of Payments and International Investment Position Manual of IMF). The underlying data does not change, it is recast and has more granularity. We are not covering it here, to keep the understanding of BOP simple. Those who are interested in a deep dive on the subject, can refer to RBI Handbook and compare

Table below captures trend in India's BOP position over the years, in USD million

We have deliberately placed Overall Balance of Payments in the first Column, for easy reference

For 2024-25, Exports:FOB were USD 441,790.1 million, Imports:CIF were USD 729,004.3 mn (imports shown with -ve sign), leading to Merchandise Balance of USD -287,214.2 mn. Negative sign indicates Imports higher than Exports. Net Invisibles were USD 263,846.0 mn, hence Current Account Balance (CAB) was USD -23,368.2 mn (Merchandise Balance + Net Invisibles). Negative sign means it is a Current Account Deficit (CAD). Net Capital Account was USD 16,788.3 mn while Net Errors and Omissions were USD 1,547.4 mn

Current Account Balance + Capital Account + Errors and Omissions =USD -23,368.2 mn + 16,788.3 mn + 1,547.4 mn = USD -ve 5,032.5 mn, same as the number in the first column, called Overall Balance of Payments position

Therefore for 2024-25, Monetary Movements and decrease in FE reserves amounted to USD 5,032.5 million