Understanding Balance of Payments

October 2012

Balance of payments
Balance of payments (BoP) is a statement that records all monetary transactions between a country and
the rest of the world.

Transactions include payments for the country's exports and imports of goods, services, financial
capital, and financial transfers.

The BoP account summarizes international transactions for a specific period, usually a quarter, and are
prepared in a single currency, typically the domestic currency for the country concerned.

BoP consists of the current account, capital account and change in foreign reserves.
The change in foreign reserves is the net of capital and current account.

Line items in BoP statement

CURRENT ACCOUNT

CAPITAL ACCOUNT

Balance of Trade in Goods & Services

Balance of merchandise Trade (Goods)

Balance of Trade in Services

Net Investment Income: Interest, dividends received on

cross-border investments, remittances from
oversees residents

Foreign Direct Investment (FDI): Long term investment

such as buying a stake (>10%) in a company in the
target country. It allows the buyer managerial powers
Foreign Institutional Investor (FII): It refers to crossborder purchases of stocks, bonds etc. It is usually
easily liquidated, hence called hot money.
Banking capital and loans

NRI deposits
Banks borrowing from parent body ( e.g. Citi bank
India borrowing from Citi Cop)

External Commercial borrowings ( Indian companies

borrowing from outside)

Foreign Aid

Understanding current and capital account

Trade Balances

Net Foreign Direct Investment

( Exports Imports of goods)

(FDI)

+
Net Services

+
Foreign Portfolio Investment
(FPI)

(Exports Imports of services)

+
+
Banking capital and loans
Net Investment Income
(remittances, interest, dividends)

+
ECB, Trade Credits

Current Account

Capital Account

Snapshot of exports & imports of BRIC,US & UK

2500
2,236
1,899
1,743

2000

US $(bn)

1,497
1500
Exports
Imports
1000
522
500

256 226

475
324

307

299

399

0
Brazil

Russia

India

China

US

UK

India, US and UK have negative trade balance i.e. trade deficit. This is because their imports are greater than their exports.
Nominal GDP (US $ bn)

Exports (as a % of GDP)

Imports (as a % of GDP)

Brazil

2,493

10.3%

9.1%

Russia

1,850

28.2%

17.5%

India

1,850

16.6%

25.7%

China

7,298

26.0%

23.9%

US

15,076

9.9%

14.8%

UK

1,508

19.8%

26.5%
Source: CEIC, IMF, Morgan Stanley Research. Data as on FY 2011
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Indias top 5 export & import constituents

Top 5 contituents of India's export in FY 2012

Top 5 Contituents of India's Import in FY 2012

Petroleum (Crude
& Products)
18%
Gems & Jewellary
15%

Petroleum, Crude &

Products
32%

Others
37%

Others
49%
Transport
Equipments
7%
Machinery And
Instruments
5%

Other Commodities
6%

Total Export in FY 2012 US $309.8 bn

Machry Excpt Elec

& Electronic
6%

Gold
12%
Perls Prcus
Semiprcs Stones
6%

Electronic Goods
7%

Total Import in FY 2012 US $499.6 bn

Source: CEIC, IMF, Morgan Stanley Research. Data as on FY 2011

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Understanding Indias balance of payments structure

Export

$309.8 bn
16.8% of GDP

$ 22.1 bn
1.2% of GDP

Net FDI
Less

Import

$499.5bn
27.1% of GDP

Add
$17.2 bn
0.9% of GDP

FII
Equals

Trade balance

Add
Remittances

Add

$ - 189.7 bn
10.3% of GDP
Loans

$19.3 bn
1.05% of GDP

$29 bn
1.6%% of GDP

Add

Add
Net Services

$ 35.04 bn
1.9% of GDP

Others

$ 47.6 bn
2.6% of GDP

Banking capital

$16.2 bn
0.9% of GDP
Add

Add

Current Account = US $ - 78.2 bn (4.2% of GDP)

Others

$ - 6.9 bn
0.4% of GDP

Capital Account = US $ 67.9 bn (3.7% of GDP)

Net of Capital & Current Account = - 78.2 + 67.9 = US $ -10.4

Source: CEIC, RBI. Data as on Mar 2012

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Explaining BoP using an analogy

Excess funds flow into foreign reserves

Lent out

+ve
Net of Current and Capital
Account

Think of foreign reserves

as a countrys bank
account. As a bank
account, it will transfer
money as and when
needed by the country.

-ve
Deficits are sourced from foreign reserves

Net of Capital & Current Account

as on March 12 : ($10.4 bn)
(sourced from our Forex reserves)

Indias Forex Reserve as on

March 11: $302.5 bn

Indias Forex Reserve as on

March 12: $291.6 bn

The fall in Forex reserves from March 11 to March 12 ($ 302.9 bn - $ 291.6 bn= $10.9 bn) is primarily
due to the outflow of $ 10.4 bn, used to fund the difference between the Capital & Current Account

BoP and currency movement

BoP is colloquially defined as net of Capital and Current Account , which is the change in foreign reserves.

3Q FY09: Negative BoP which means net foreign exchange outflow and it corresponds to INR depreciating from Rs 45 to
a dollar to Rs 50 to a dollar

Surplus in BoP

Addition to foreign reserves

Demand for INR

Appreciation of INR

Deficit in BoP

Depletion of foreign reserves

Demand for USD

Depreciation of INR

Source: RBI,MOSL
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Disclaimer
This presentation shall not constitute any offer to sell or solicitation of an offer to buy units of any of
the Schemes of the DSP BlackRock Mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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Annexure 1: Indias overall BoP (US $bn)

FY09

Q4 FY11

Q4 FY12

FY11
(US$88/bbl)

FY12
(US$108/bbl)

FY13
(US$107/bbl)

FY14

Item
Current Account
% of GDP
Trade balance
- Exports
- Imports
o/w Oil imports
Invisibles
o/w income from forex reserv.
Capital Account
Foreign investment
- FDI
- FII+
Banking capital
- NRI deposits
Short term credit
ECBs
External assistance
Others
Overall balance
Memo

FY10
(US$69/bbl)

-28.8
-2.3
-118.7
189.0
307.7
93.7
89.9
10.9
12.3
8.4
22.4
-14.0
-3.2
4.3
-1.9
7.9
2.6
-1.5
-16.5

-38.4
-2.8
-118.4
182.2
300.6
87.1
80.0
5.9
52.7
50.4
18.0
32.4
2.1
2.9
7.6
2.8
2.9
-13.0
14.3

-6.3
-1.7
-30.0
77.4
107.4
0.0
23.7
0.0
9.2
1.3
1.1
0.2
-0.8
0.9
2.7
3.0
0.8
2.3
2.9

-21.7
-4.5
-51.6
80.0
131.6
0.0
29.9
0.0
16.6
15.3
1.4
13.9
2.0
4.7
0.2
2.3
0.3
-3.4
-5.1

-46.0
-2.7
-130.6
250.6
381.2
106.1
84.6
7.0
62.1
39.7
9.4
30.3
5.0
3.2
11.0
12.5
4.9
-11.0
16.1

-78.2
-4.2
-189.8
309.8
499.6
155.6
111.6
7.0
67.8
39.2
22.1
17.2
16.2
11.9
6.7
10.3
2.3
-6.9
-10.4

-70.5
-3.8
-183.5
327.0
510.5
149.0
113.0
7.0
74.0
36.0
20.0
16.0
12.0
12.0
10.0
12.0
4.0
0.0
3.5

-77.0
-3.4
-202.0
357.0
559.0
156.0
125.0
7.0
105.0
55.0
25.0
30.0
15.0
15.0
15.0
16.0
4.0
0.0
28.0

RBI's forex intervention

-34.9

-2.7

1.7

-19.7

-7.5

17.0

Source: RBI, BofA Merrill Lynch Global Research estimates.

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