A systematic record of all economic transactions between residents of a country and the rest of the world over a period, divided into the current account (trade in goods and services, income and transfers) and the capital or financial account (investment and borrowing flows), with changes in foreign exchange reserves balancing the two.
Every time an Indian firm exports software, a family receives money from a relative abroad, a foreign investor buys shares in Mumbai or the government repays an external loan, foreign exchange moves across the border. The balance of payments collects all these flows in a double-entry format, so that in principle every credit has a matching debit. If the country buys more from abroad than it sells, the gap must be met by borrowing, attracting investment or drawing down reserves.
India's modern economic history is closely tied to its balance of payments. The 1991 crisis, when foreign exchange reserves fell to only a few weeks of imports and gold had to be pledged abroad, triggered the reforms that opened the economy. In 2013 a widening current account deficit and the "taper tantrum" caused a sharp fall in the rupee. The approach to the accounts follows the IMF's Balance of Payments Manual, now in its sixth edition. This page explains how to read the accounts as a diagnostic tool, while exchange rate regimes and convertibility are covered in the main lesson.
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