GETTING SMARTER SERIES

Balance of Payments (BoP): Understanding India’s external situation

What is Balance of Payments (BoP)?

BOP shows the net difference in the flow of money between India and Rest of the world (RoW). If India’s receipts are
greater than its outflows, it demonstrates a BoP Surplus and vice versa.

Balance of
Payments

Capital and
Current A/C Financial
A/C

Primary Secondary Net Foreign Net Foreign

Trade Balance Income Income Portfolio Direct Loans
Balance Balance Investment Investment
Understanding Components Of The Current Account

Current Account Balance is useful to understand the state of

economy before the capital and financial flows are accounted for. India has been a current account deficit economy
(with an exception of modest surplus in the Covid era). Usually, up to 2.5% of GDP in deficit is manageable.

The difference between the value of a

country's exports and the value of its imports.
Trade Balance This includes merchandise trade deficit( at
USD 36 bn/quarter*) and services surplus( at
USD 23 bn/quarter*)

The head of Net primary income comprises

Current Primary Income
employee compensation & interest,
dividend on investments abroad. This
Account recently stands at a deficit of USD
8.3bn/quarter*.

When income is remitted by a person living

abroad back to his home country, it is
Secondary Income
categorized under Secondary Income. A
surplus of ~USD 18.7 bn/quarter* has been
recorded under this head.
* Last 3 year average
 Understanding Components Of The Capital and Financial Account

Capital account records all international purchases and sales of assets such as money, stocks, bonds, etc. It
also includes foreign investments in India and loans to India
When a foreign company invests in a
business by taking majority control, the
investment in the economy is included
Foreign Direct Investment (FDI)
under FDI. (Think of Walmart-Flipkart
deal!) The recent run-rate is at USD 10
bn/quarter*.

Any inflows from FIIs in Indian Financial

Capital markets (debt & equity) are recorded
and Foreign Portfolio Investment (FPI) under this head. India’s run-rate of net FPI
inflows is ~USD 4 bn/quarter*, though this
Financial number can be very volatile.
Account
Loans comprise of -
External Assistance
External Commercial Borrowings
Loans
Banking Capital
A surplus of USD 0.8 bn/quarter* has
been the recent average
* Last 3 year average
What happens if there is a deficit?

A BOP deficit occurs when more dollars are going out of the economy than what are coming in the economy. A high
deficit reflects negatively on the currency. Why?
Ways to manage deficit: Why is a huge/unsustainable BOP a bad macroeconomic
condition to have? It creates a vicious circle

1. Run down on Forex Reserves Huge BOP Deficit

While running down on some forex to service
deficit is normal, persistently high BOP and
inability to service deficit via forex reserves Chances of de-rating of the Increased demand for
leads to BOP crisis. For example, think of India in country, which further dampens foreign currency
1991 or Sri Lanka of today! FPI flows

2. Take fiscal help

Government of India can also raise loans from
abroad via the Public Sector Enterprises to Dampening of domestic Depreciation pressure
growth on national currency
temporarily manage the BOP accounts.

Raise concerns on inflation/

higher cost of imports
What does a BOP release look like?

Source: https://www.rbi.org.in/
Balance of Payments : The current dynamics

• Oil is sustaining at multi year high and the strong domestic demand is keeping imports high. Collectively,
the trade deficit is worsening and averaging close to USD 20 bn in the recent months.

• Unlike goods, where India has a large deficit, on the services front there was a trade surplus of $105
billion in FY22 against $88.6 billion in FY21 and this number continues to improve cushioning the
current account. India’s Current Account Deficit is seen at ~ 2.3 per cent of GDP in FY23.

• FPI witnessed a sharp decline for seven months to April 2022, withdrawing a massive net amount of
over USD 21.2 billion from equities. A continuation of this trend will worsen the BOP outlook for FY23.

• On the other hand, FDI and ECBs have maintained their healthy pace of inflows of USD 4 bn/month in the
recent months helping the flows.

• The next data release for FY22 is expected at the end of June 2022. We hope this version of Getting
Smarter series will help you in understanding the news better!
Disclaimer

Disclaimer: In this material DSP Investment Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including
information developed in-house. Information gathered and used in this material is believed to be from reliable sources. The AMC
however does not warrant the accuracy, reasonableness and / or completeness of any information. The above data/statistic are given
only for illustration purpose. The recipient(s) before acting on any information herein should make his/their own investigation and seek
appropriate professional advice. This is a generic update; it shall not constitute any offer to sell or solicitation of an offer to buy units of
any of the Schemes of the DSP Mutual Fund.

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