The Balance of Payments (BoP) is an accounting framework that systematically records all economic transactions between a country's residents and the rest of the world over a specific period, typically a quarter or a year. It is a concept used to monitor international financial activities and assess a nation's economic health. The BoP framework gained prominence after the Bretton Woods era (1945–1971) and is standardized globally by the International Monetary Fund (IMF) through its Balance of Payments Manual (BPM).
The mechanism works on a double-entry bookkeeping system, where every international transaction is recorded twice, once as a credit (inflow) and once as a debit (outflow). The BoP is divided into three main accounts: the Current Account, the Capital Account, and the Financial Account. The Current Account tracks the flow of goods, services, income, and current transfers, with the Balance of Trade being a key component. The Capital Account records international transfers of non-financial assets. The Financial Account captures investment flows, such as Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Theoretically, the sum of the Current Account, Capital Account, Financial Account, and a balancing item must equal zero.
In India, the Reserve Bank of India (RBI) publishes the BoP data, which is presented according to the IMF's BPM6 methodology. India's BoP is closely connected to the country's Foreign Exchange Reserves, which are used to finance a Current Account Deficit (CAD). Recently, India's current account recorded a surplus of 0.9% of GDP in 2020-21 due to a sharp contraction in imports, but it returned to a deficit in 2021-22 and 2022-23 due to rising commodity prices.