Think of the BoP like a family’s annual financial statement. On one side, all the money coming into the family. On the other side, all the money going out. The BoP does exactly this — but for an entire country. It records every single economic transaction between India and the rest of the world.
The Current Account — the “income and expenses” part
This records day-to-day transactions. It has four components.
Trade balance (merchandise trade). The difference between what India exports (goods sold abroad) and what India imports. India typically runs a trade deficit — we import more than we export. In FY2025-26, India’s merchandise trade deficit widened to US $337.3 billion. Imports grew 7.6% but exports grew just 0.9%. The biggest import items: crude oil (India imports 85% of its needs), gold, electronic goods and chemicals. The biggest export items: petroleum products (refined), gems and jewellery, IT services, pharma and textiles.
Services trade. This is India’s superpower. IT services, business process outsourcing, financial services, travel and tourism — India earns a massive surplus here. In FY2025-26, services exports were strong enough to partly offset the merchandise deficit. Think of it as: we buy physical goods from the world (deficit), but the world buys our brainpower (surplus).
Primary income. Investment income flowing in and out. When Infosys earns profits in the US, some comes back to India (inflow). When a British company in India sends profits to London, that is an outflow. India typically has a deficit here — more foreign companies earn in India than Indian companies earn abroad.
Secondary income (transfers). This is where remittances sit. When an Indian IT professional in the UK or a worker in Dubai sends money home, that is an inward transfer. India is the world’s largest recipient of remittances — US $41.3 billion in Q4 FY2026 alone. Remittances are a massive strength: they require no repayment, they support consumption in rural areas, and they cushion the current account deficit.
The Capital and Financial Account — the “savings and borrowings” part
- Foreign Portfolio Investment (FPI/FII): when a hedge fund in New York buys shares on the BSE. Short-term, volatile, and can leave quickly. In FY2025-26, FPIs pulled out US $16.4 billion from India — a massive outflow compared with a US $3.6 billion inflow the previous year. This is “hot money” and is a major vulnerability.
- External Commercial Borrowings (ECBs): when an Indian company borrows from a foreign lender. The money comes in now but has to be repaid with interest later.
- NRI deposits: money NRIs keep in Indian bank accounts (NRE, NRO, FCNR accounts).
- Other capital: government borrowings, IMF transactions, SDR allocations.
The golden rule of BoP. The BoP always balances. If there is a deficit in the current account (we spend more than we earn), it must be financed by a surplus in the capital account (we borrow or attract investment). If even that is not enough, the RBI uses forex reserves to plug the remaining gap. In FY2025-26, forex reserves depleted by US $23.6 billion — meaning capital account inflows were not enough to fully cover the current account deficit and other outflows.
India's BoP — the current picture (FY2025-26)
| Indicator | FY2025-26 | FY2024-25 | Direction |
|---|
| Current Account Deficit (CAD) | $25.2 billion | $22.9 billion | Widened |
| CAD as % of GDP | ~0.6-0.7% | ~0.6% | Manageable |
| Merchandise trade deficit | $337.3 billion | $286.9 billion | Widened sharply |
| Q4 current account | +$7.1 billion surplus | +$13.7 billion surplus | Surplus (seasonal) |
| Remittances (Q4 alone) | $41.3 billion | — | Record high |
| Net FPI flows | -$16.4 billion | +$3.6 billion | Massive reversal |
| Net FDI inflows | $6.9 billion | $1 billion | Strong recovery |
| Forex reserves (Mar 2026) | $691.1 billion | — | 11 months import cover |
| Forex reserves (peak, Feb 2026) | $728.5 billion | — | All-time high |
| Rupee (approximate) | ~₹95.65/$ | ~₹85/$ | Significant depreciation |
The key story: India’s CAD is manageable (under 1% of GDP is safe). But the merchandise trade deficit is widening dangerously. What saves India is the services surplus and massive remittances. However, FPI outflows are a serious concern — hot money leaving puts pressure on the rupee.
The 2012-13 crisis — India's BoP case study (a UPSC favourite)
This is the most important case study for external sector questions. In 2013, the US Federal Reserve hinted at “tapering” its bond-buying programme. What happened: FPIs pulled money out of India massively. The rupee crashed from ₹54 to ₹68 per dollar. The CAD hit 4.8% of GDP — dangerously high. Forex reserves fell to US $300 billion (barely seven months of import cover). India was classified as one of the “Fragile Five” economies.
India’s emergency response: gold import restrictions (to reduce the trade deficit); a special NRI deposit scheme (FCNR-B) offering attractive rates to attract dollar inflows; fiscal tightening; and RBI rate hikes to defend the rupee.
Why this matters in 2026: today’s forex reserves (US $691 billion, 11 months of cover) are far stronger than in 2013. But the vulnerability pattern is the same — when US interest rates are high, FPIs pull money out of emerging markets including India, putting pressure on the rupee. In FY2025-26, FPIs pulled out US $16.4 billion and the RBI sold over US $100 billion in spot and forward markets to manage the rupee’s depreciation. The defence is stronger, but the threat remains.