Q.Explain the components of the Current Account and the Capital Account of the Balance of Payments.

The BOP splits into accounts that group similar kinds of international transactions together — income-type flows in one, capital/ownership-type flows in another.

Current Account records transactions of a recurring, income-generating nature:

• Visible trade — export/import of physical goods (this is the Balance of Trade).
• Invisible trade (services) — shipping, banking, insurance, IT/software services, tourism receipts/payments.
• Income — interest, profit, dividends on foreign investments, and compensation of employees.
• Current transfers — gifts, donations, and remittances sent home by NRIs, with no economic return expected.

Capital Account records transactions that change a country's external assets/liabilities:

• External loans and borrowings, government and commercial.
• Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).
• Banking capital, including NRI deposits.
• Rupee debt service and other capital transfers.

A third account, the Official Reserve Account, records the change in the country's official foreign-exchange reserves used to settle any net gap left after combining the Current and Capital Accounts.

Placing NRI remittances (a Current Account current transfer) under the Capital Account, or placing FDI (a Capital Account item) under the Current Account — the two are frequently swapped by students.