How a country keeps score of its transactions with the rest of the world — and what happens when the books don't balance.
The Balance of Payments (BoP) is a systematic record of a country's economic transactions with the rest of the world over a period, split into two main accounts: the Current Account (trade in goods and services, income, and unilateral transfers/remittances) and the Capital Account (foreign investment, loans, and changes in reserves).
A Current Account Deficit occurs when a country's imports of goods, services and transfers exceed its exports. India has typically run a CAD, financed by capital account inflows such as Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), and external borrowing.
By 1991, India's foreign exchange reserves had fallen to barely two weeks of imports, forcing the government to pledge gold reserves and approach the IMF for a loan — a pivotal moment that triggered the 1991 economic reforms (liberalisation, privatisation, globalisation).
The Reserve Bank of India manages the country's foreign exchange reserves (foreign currency assets, gold, SDRs, and the Reserve Tranche Position with the IMF) and intervenes in the forex market to manage rupee volatility under a broadly market-determined exchange rate regime.
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