- The balance of payments (BoP) records all transactions between residents of India and the rest of the world in a period. It has two main parts: the current account and the capital account.
- India usually runs a current account deficit (it imports more goods than it exports) that is financed by capital inflows such as FDI, FPI and loans.
- The rupee has a market-determined, managed floating exchange rate: the RBI intervenes only to curb excessive volatility.
What Goes Where in the BoP
| Current account | Capital account |
|---|---|
| Merchandise trade — exports and imports of goods (the trade balance) | Foreign investment — FDI and FPI |
| Services (invisibles) — IT, tourism, shipping | External borrowings — commercial borrowings, loans |
| Transfers — remittances from Indians abroad (India is the world's largest recipient) | Banking capital — including NRI deposits |
| Primary income — interest, dividends, profits | Changes in forex reserves balance the account |
India's goods trade is in deficit, but its services exports and remittances are in large surplus, which keeps the overall current account deficit moderate.
FDI vs FPI
| Foreign Direct Investment | Foreign Portfolio Investment | |
|---|---|---|
| Threshold | 10% or more of a listed company's equity | Less than 10% |
| Nature | Long-term, brings management control and technology | Short-term, "hot money" that can leave quickly |
| Regulator | DPIIT policy; RBI under FEMA | SEBI |
| Routes | Automatic (no prior approval) or government route | Through stock markets |
FDI threshold≥10% equity
FEMA1999 (replaced FERA 1973)
Current account convertibility1994
FTP 2023From April 1, 2023
India–UAE CEPAIn force May 1, 2022
India–EFTA TEPAIn force Oct 1, 2025
Forex Reserves and the Rupee
- India's forex reserves have four components: foreign currency assets (the largest), gold, Special Drawing Rights (SDRs) and the reserve tranche position with the IMF. The RBI manages them.
- Depreciation is a fall in the currency's value due to market forces; devaluation is a deliberate cut under a fixed exchange rate. India devalued the rupee in 1966 and 1991.
- In 1991, India airlifted gold to the Bank of England and the Bank of Japan to raise emergency funds during its balance-of-payments crisis.
- The LERMS dual exchange rate (1992) gave way to a market-determined rate in March 1993. The rupee became fully convertible on the current account in August 1994 (accepting IMF Article VIII). Capital account convertibility is still partial (Tarapore Committees, 1997 and 2006).
- A weaker rupee makes exports cheaper and imports, especially crude oil, more expensive.
Laws and Policies
- FEMA, 1999 replaced the restrictive FERA, 1973: violations became civil rather than criminal offences. The Enforcement Directorate enforces it.
- Foreign Trade Policy 2023 came into effect on April 1, 2023 with no fixed end date, targeting $2 trillion of exports by 2030 and promoting trade settlement in rupees.
- RoDTEP refunds embedded taxes and duties on exported goods; SEZs operate under the SEZ Act, 2005.
WTO Subsidy Boxes
| Box | Meaning |
|---|---|
| Amber | Trade-distorting support (e.g., price support) — must be reduced; capped at 10% of production value for developing countries (the de minimis limit) |
| Blue | Amber support with conditions that limit production |
| Green | Minimal or no trade distortion (research, environmental programmes) — allowed without limit |
India's public stockholding for food security is protected by a "peace clause" agreed at the Bali Ministerial Conference (2013).
India's Recent Trade Agreements
| Agreement | Status |
|---|---|
| India–UAE CEPA | Signed February 2022; in force May 1, 2022 |
| India–Australia ECTA | In force December 29, 2022 |
| India–EFTA TEPA (Switzerland, Norway, Iceland, Liechtenstein) | Signed March 10, 2024; in force October 1, 2025; includes a goal of $100 billion EFTA investment over 15 years |
| India–UK CETA | Signed July 2025 |
India withdrew from RCEP negotiations in November 2019. For deeper coverage see our India–UAE CEPA and India–EU FTA notes.
- Classification: "Which of these is part of the capital account?" — FDI, FPI, ECBs, NRI deposits. Remittances go in the current account.
- Definitions: depreciation vs devaluation; FDI vs FPI (10% rule); current vs capital account convertibility.
- WTO boxes: which box allows unlimited subsidies (green).
Q1. Remittances sent home by Indians working abroad are recorded in the:
✅ Answer: (b) Current account
💡 Explanation: Private transfers such as remittances are part of the current account.
Q2. An investment of what minimum share of equity in a listed Indian company is treated as FDI?
✅ Answer: (a) 10%
💡 Explanation: Below 10% it is foreign portfolio investment; 10% or more is FDI.
Q3. FEMA, 1999 replaced:
✅ Answer: (d) FERA, 1973
💡 Explanation: FEMA replaced the Foreign Exchange Regulation Act and made violations civil offences.
Q4. Under WTO rules, subsidies that cause minimal or no trade distortion fall in the:
✅ Answer: (c) Green box
💡 Explanation: Green box subsidies are allowed without limits.
Q5. The India–EFTA Trade and Economic Partnership Agreement came into force on:
✅ Answer: (d) October 1, 2025
💡 Explanation: It was signed in March 2024 and entered into force on October 1, 2025.
🔁 Revise in 60 Seconds
- Current account: goods, services, remittances, income. Capital account: FDI, FPI, loans, NRI deposits.
- FDI ≥10%, FPI <10% (SEBI); forex = FCA + gold + SDR + IMF reserve tranche.
- Market rate 1993; current account convertibility Aug 1994; FEMA 1999 replaced FERA 1973.
- FTP 2023 ($2 tn exports by 2030); UAE CEPA 2022, Australia ECTA 2022, EFTA TEPA Oct 2025, UK CETA signed 2025.
📌 Prelims Traps to Avoid
- ✘ Devaluation is a policy decision; depreciation is market-driven.
- ✘ India has full current account but only partial capital account convertibility.
- ✘ Remittances are in the current account, not the capital account.
What is the difference between FDI and FPI?
FDI is an investment of 10% or more in a company's equity, usually long-term and with management interest. FPI is a smaller holding (below 10%) in stocks and bonds, regulated by SEBI, which can move in and out quickly.
What are the components of India's foreign exchange reserves?
Foreign currency assets (the largest part), gold, Special Drawing Rights (SDRs) and the reserve tranche position with the IMF.