Q.State the components of the Current Account and the Capital Account of India's Balance of Payments.

The Current Account and Capital Account together make up the full Balance of Payments, each with its own distinct components.

The Balance of Payments has two principal accounts, each with its own components. The CURRENT ACCOUNT records: (i) trade in goods (visible trade — exports and imports of merchandise, the same visible trade the Balance of Trade measures); (ii) trade in services (invisible trade — banking, insurance, shipping, tourism, software/IT services); and (iii) income and unilateral transfers (interest, profits and dividends earned on foreign investments, plus one-way transfers such as remittances sent home by Indians working abroad, gifts and donations). The CAPITAL ACCOUNT records international capital transactions: (i) Foreign Direct Investment (FDI); (ii) Foreign Portfolio Investment (FPI); (iii) external borrowing and lending by government and businesses; and (iv) changes in the country's foreign exchange reserves held by its central bank. Together, the Current Account balance and the Capital Account balance make up the full Balance of Payments.

Students sometimes place FDI/FPI under the Current Account by mistake — investment flows belong to the CAPITAL Account, since they represent a change in international assets/liabilities, not a recurring trade/income transaction.