Understanding Balance of Payments

October 2012

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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.

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Line items in BoP statement

CURRENT ACCOUNT CAPITAL ACCOUNT

Balance of Trade in Goods & Services

Foreign Direct Investment (FDI): Long term investment
• Balance of merchandise Trade (Goods) such as buying a stake (>10%) in a company in the
• Balance of Trade in Services target country. It allows the buyer managerial powers

Foreign Institutional Investor (FII): It refers to cross-

Net Investment Income: Interest, dividends received on
border purchases of stocks, bonds etc. It is usually
cross-border investments, remittances from
easily liquidated, hence called ‘hot money’.
oversees residents

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

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Understanding current and capital account

Trade Balances Net Foreign Direct Investment

( Exports – Imports of goods) (FDI)

+ +
Foreign Portfolio Investment
Net Services (FPI)
(Exports – Imports of services)

+
+
Banking capital and loans

Net Investment Income

(remittances, interest, dividends) +

ECB, Trade Credits

Current Account Capital Account

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Snapshot of exports & imports of BRIC,US & UK

2500
2,236

2000 1,899
1,743
1,497
1500
US $(bn)

Exports
Imports
1000

522 475
500 399
324 307 299
256 226

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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India’s 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%
Petroleum, Crude &
Others Products
Gems & Jewellary 37%
15%
32%

Others
49%
Transport
Equipments
Gold
7% Machry Excpt Elec 12%
& Electronic Electronic Goods
Machinery And Other Commodities 6% Perls Prcus 7%
Instruments 6% Semiprcs Stones
5% 6%

Total Export in FY 2012 – US $309.8 bn 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 India’s balance of payments structure

Export $309.8 bn $ 22.1 bn

16.8% of GDP Net FDI 1.2% of GDP

Less Add
Import $499.5bn
27.1% of GDP FII $17.2 bn
Equals 0.9% of GDP
Add
Trade balance $ - 189.7 bn
10.3% of GDP
Loans $19.3 bn
Add 1.05% of GDP
Remittances $29 bn Add
1.6%% of GDP

Add $16.2 bn
$ 35.04 bn Banking capital
Net Services 0.9% of GDP
1.9% of GDP

Add
$ 47.6 bn Add
$ - 6.9 bn
Others 2.6% of GDP Others 0.4% of GDP

Current Account = US $ - 78.2 bn (4.2% 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

+ve
Think of foreign reserves
as a country’s bank

Lent out
Net of Current and Capital account. As a bank
Account 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)

India’s Forex Reserve as on India’s Forex Reserve as on

March ’11: $302.5 bn 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

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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: India’s overall BoP (US $bn)

FY09 FY10 Q4 FY11 Q4 FY12 FY11 FY12 FY13 FY14

Item (US$69/bbl) (US$88/bbl) (US$108/bbl) (US$107/bbl)
Current Account -28.8 -38.4 -6.3 -21.7 -46.0 -78.2 -70.5 -77.0
% of GDP -2.3 -2.8 -1.7 -4.5 -2.7 -4.2 -3.8 -3.4
Trade balance -118.7 -118.4 -30.0 -51.6 -130.6 -189.8 -183.5 -202.0
- Exports 189.0 182.2 77.4 80.0 250.6 309.8 327.0 357.0
- Imports 307.7 300.6 107.4 131.6 381.2 499.6 510.5 559.0
o/w Oil imports 93.7 87.1 0.0 0.0 106.1 155.6 149.0 156.0
Invisibles 89.9 80.0 23.7 29.9 84.6 111.6 113.0 125.0
o/w income from forex reserv. 10.9 5.9 0.0 0.0 7.0 7.0 7.0 7.0
Capital Account 12.3 52.7 9.2 16.6 62.1 67.8 74.0 105.0
Foreign investment 8.4 50.4 1.3 15.3 39.7 39.2 36.0 55.0
- FDI 22.4 18.0 1.1 1.4 9.4 22.1 20.0 25.0
- FII+ -14.0 32.4 0.2 13.9 30.3 17.2 16.0 30.0
Banking capital -3.2 2.1 -0.8 2.0 5.0 16.2 12.0 15.0
- NRI deposits 4.3 2.9 0.9 4.7 3.2 11.9 12.0 15.0
Short term credit -1.9 7.6 2.7 0.2 11.0 6.7 10.0 15.0
ECBs 7.9 2.8 3.0 2.3 12.5 10.3 12.0 16.0
External assistance 2.6 2.9 0.8 0.3 4.9 2.3 4.0 4.0
Others -1.5 -13.0 2.3 -3.4 -11.0 -6.9 0.0 0.0
Overall balance -16.5 14.3 2.9 -5.1 16.1 -10.4 3.5 28.0
Memo
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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