External Sector & Trade

📖 Balance of Payments (BoP)

The BoP is a record of all economic transactions between residents of a country and the rest of the world over a period, divided into two main accounts:

• Current Account — trade in goods and services, income flows, and transfers (remittances).
• Capital Account — capital transactions like investments, loans, and changes in foreign exchange reserves.

A Current Account Deficit (CAD) means India imports more (goods, services, income outflows) than it exports — a persistent feature of the Indian economy, typically financed by capital account inflows.

💵 FDI vs FPI

• FDI (Foreign Direct Investment) — investment with a lasting management interest (e.g. building a factory, acquiring significant equity) — generally considered more stable.
• FPI (Foreign Portfolio Investment) — investment in financial assets like stocks and bonds, without management control — more volatile, can move in and out quickly ("hot money").

🤝 Trade agreements

India engages in various Free Trade Agreements (FTAs) and Comprehensive Economic Partnership Agreements to reduce tariffs and boost trade with partner countries, though India has also stayed cautious about some large multilateral pacts (e.g. not joining RCEP in 2019).

💰 Foreign Exchange Reserves

India's forex reserves — comprising foreign currency assets, gold, SDRs, and the RBI's reserve position with the IMF — act as a buffer against external shocks and help maintain currency stability, managed by the RBI.