Balance of Payments (BoP) in India: Meaning, Components, Trends & Impact

Balance of Payments (BoP) is an essential statistic for measuring and understanding a country's economic transactions with its partner countries in international trade. A healthy BoP ensures currency stability and monetary sovereignty, whereas a negative balance may lead to dependence on external debt and rises in domestic prices. 

Key Takeaways

• BoP acts as a cash flow statement of a country recording cross-border transactions. It records both capital and current account transactions. 
• The Q2 FY26 Current Account Deficit in India stood at $12.3 Billion. 
• India's energy dependence on imported crude oil results in a consistent deficit in the current account balance of payments. 
• Substantial foreign exchange reserves and inflows of foreign investment help India meet its current account deficit in the BoP. 

What is Balance of Payments (BoP)?

It is a systematic approach to record cross-border transactions between individuals and companies of one country and another over a specific time period. For coherent economic reference, a BoP period can be monthly, quarterly or yearly. In comparison to household budgeting, we can define BoP as the records of a country's income and expenditures. 

• Incomes are exports, inward remittances, receiving dividends and interest payments received from investments in foreign assets and inflow of foreign investments. 
• Expenses are imports, capital outflow for investing in foreign assets and payment of interests on foreign debts.

BoP improves as long as income exceeds expenses, resulting in a surplus. When outflow exceeds income, a negative balance results i.e, deficit.  

Components of India's Balance of Payments

The RBI segregates India's BoP primarily into two accounts. These are the current account and Capital account. 

• The Current account keeps track of monetary flow emerging from goods and services trading, income from foreign assets and net transfers or remittances. It indicates how an economy is competing in international trading relations. 
• The Capital account measures the net cross-border flow of capital in the form of portfolio investments (FPIs), foreign direct investments (FDIs), borrowing in the form of foreign debts and deposits made by non-resident Indians. 

India's Balance of Payments Trends

India's BoP is characterised by a consistent deficit in the current account balance. The reason is the country's large crude oil import bill. As of the first week of December, 2025, India's 2nd Quarter FY2025-26 Current Account Deficit (CAD) stood at $12.3 Billion. On a Year-on-Year basis, CAD decreased from $20.8 billion in Q2 FY2024-25. The improved CAD can be attributed to both a marginal decline in merchandise and a rise in net service export. 

On the capital account front, the Indian economy experienced a marginal increase in FDI in equities. It stood at $18.62 billion during Q1 FY2025-26, as compared to $16.17 billion during Q1 FY2024-25. The FPI account suffered volatility throughout the Q1 and Q2 of FY2025-26. During Q1, foreign portfolio investments into equities were net positive. It turned net negative in Q2. As per the NSDL data, FPI witnessed a net outflow of $9.5 billion during the 2025 calendar year. It is significantly lower compared to the new inflow of FPI of $20 billion during the same period of 2024. 

The key trends in India's BoP are:

• Major drivers behind merchandise trade deficits are crude oil and gold imports.
• Services exports delivered a consistent, strong performance.     
• Moderation in CAD resulted from services export income and NRI remittances. 
• Net outflow of FPI, along with a wide merchandise trade gap, put significant pressure on the rupee's valuation.  

Causes of BoP Surplus and Deficit in India

India has consistently experienced deficits in current account balances. Overall impact of this deficit in the BoP gets moderated by strong performance in services export, net remittance from NRIs and periodic net surplus in capital accounts. 

The primary reasons behind the CA deficit are:

• Petroleum import - Heavy dependence of the Indian economy on imported crude oil for energy purposes. 
• Gold consumption - The Indian population is the largest private consumer base for gold, leading to heavy gold import bills. It drains out a significant portion of foreign exchange. 
• Inelasticity of imports - Along with petroleum and gold, India meets its demand for electronics, fertilisers and edible oils through imports. They also worsen the merchandise trade gap. 

The deficit in the merchandise trade balance in the BoP is met with surpluses in services trade, remittance inflow and capital account surpluses. Except for FPIs, India scores a surplus in these accounts. The primary reasons are:

• Strong performance of India's IT and ITeS sectors.  
• NRIs living and working abroad are sending money back to India.  
• The long-term growth potential of the Indian economy attracts a steady flow of FDI. 

Summary of factors behind positive and negative movements in India's BoP: 

Impact of BoP on India's Economy

Surplus or deficit in India's BoP can have significant consequences for individual Indian citizens and business entities. 

• Exchange rate of Indian rupees - Negative BoP directly implies devaluation of Indian rupees. It means Indian currency is losing value against international currencies, like the USD. So, imports become more expensive. As a large portion of India's import basket is price-inelastic (petroleum, fertiliser and computer electronics). The increase in import costs further aggravates BoP deficits. 
• Prices of commodities in the domestic market - Expensive fertiliser and crude oil impact prices of a broad spectrum of goods in domestic markets negatively.  
• Bank interest rates - Deficit in current accounts makes it essential to attract foreign capital inflow to equities and debts. Attracting foreign debt capital requires offering higher interest rates. It influences the RBI’s monetary policy and exchange rate decisions.  

Challenges in India's Balance of Payments

The significant challenges India faces in maintaining the country's BoP are:

• Volatility in international crude oil prices 
• Less than satisfactory export performances 
• Increasing protectionist approach to international trade across developed countries
• Volatility in FPI flow due to short-term fluctuations in foreign portfolio investors' sentiments.