The current account is concerned with a country’s money inflows and outflows over a year. Trading operations (export and import of products and services) and financial transfers cause this inflow/outflow of money. It’s one of the two accounts that make up the balance sheet. The actual transactions in the current account are referred to as such because they have a genuine impact on income, production, and employment levels in the economy through the flow of commodities and services. The Reserve Bank of India is in charge of current account reporting. A negative current account balance indicates that imports surpass exports, and overall expenditure exceeds savings. While a positive ratio indicates that exports outnumber imports and savings outnumber consumption.
The current account records activities such as the export and import of products (visible commerce) and services (invisible trade) and income transfers and investment income from elements such as land or foreign stocks. The current account is a reflection of an economy’s current financial situation. The debit and credit of foreign currencies from these transactions are reported in the existing account’s final balance. The sum of the current version and trade balances is referred to as the current account balance.
The current account is concerned with a country’s short-term transactions and the gap between savings and investments. Actual transactions (since they have a genuine impact on income), production, and employment levels through the flow of goods and services in the economy) are another name for them.
Visible commerce (goods exported and imported), invisible trade (services exported and imported), unilateral transfers, and investment income make up the current account (income from factors such as land or foreign shares). The credit and debit of foreign currencies resulting from these transactions are likewise reflected in the current account balance. The resulting current account balance is roughly equal to the sum of the trade balance.
The following methods are used to record transactions in the current account:
- In the balance of payments, exports are recorded as credits.
- Imports are deducted from the balance of payments.
Economists and other observers use the current account to understand how the country is doing economically. The trade balance, or the difference between exports and imports, determines whether a country’s current ratio is positive or negative. When the current account balance is positive, the government is considered a “net lender” to the rest of the globe. The current account balance is negative when there is a deficit. That country is regarded as a net borrower in this scenario.
During a recession, the country’s current account deficit shrinks as imports fall and exports to stronger countries rise. However, if exports remain flat but imports rise as the economy grows, the current account imbalance widens.
The Capital Account, which documents the movement of capital in the economy due to capital inflows and expenditures, makes up the other half of the Balance of Payments. Foreign investment in domestic assets and domestic investment in foreign assets are both recognized. Analyzing the entry and outflow of funds from the country’s economy might reveal the details. Loans or investments might be used to raise funds.
Investments made by both the public and private sectors are combined in the Capital Account. Debt-creating or non-debt-creating capital flows are both possible. The components of the Capital Account are as follows:
Foreign Direct Investment (FDI) is when a foreign business invests in and controls a company based in another country.
What are some examples of services found in a current account?
Capital account transactions that are legal
The following two categories define the permissible capital account transactions:
- For those who live in India
- Persons residing outside of India
Category I – Transactions on the capital account are permissible for Indian residents.
Presented below is the list of capital account transactions that are particularly approved for the person’s resident outside India:
(a) An Indian resident’s investment in foreign securities
The transaction must comply with the Foreign Exchange Management (Transfer or Issue of Foreign Security by a Person Resident in India) Regulations, 2004.
For example, remittances of up to USD 1 billion (or its equivalent) in a financial year are permitted for investment in foreign assets, subject to the condition that the remittance does not exceed 400 per cent of the Indian Party’s net value as of the most recent audited balance sheet.
(b) Foreign currency loans raised by an Indian resident in India and abroad.
The transaction must stay within the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 limits.
Foreign currency borrowing limits are divided into two categories:
Based on maturity term: Depending on the maturity period, foreign currency loans can be raised in various ways. If the average maturity time is three years, the specified loan up to USD 50 million (or equivalent) may be extended under Track I and Track III. If the average maturity period is five years, the borrowing limit may be increased to an unlimited amount (however, relaxation is granted to certain classes of borrowers). Available foreign currency loans may be raised under Track II if the average maturity duration is 10 years.
Borrower Eligibility: The maximum amount of foreign currency loans varies depending on the type of borrower. Infrastructure firms, core investment firms, and some NBFCs, among others, may raise USD 750 million (or its equivalent). The software development sector and businesses engaging in microfinance activities may increase to USD 200 million (or its equivalent). Other entities, as indicated, may raise to USD 500 million (or its equivalent).
c) A person residing in India transfers immovable property outside of India.
The requirements of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015, will apply to such transfers.
(d) Guarantees given by a person residing in India in favour of a person living elsewhere in the world
An authorized dealer may provide a guarantee of up to USD 5,00,000 (or its equivalent) in favour of a non-resident service provider on behalf of a resident customer who is a service importer (other than a PSU or Government undertaking) on prescribed terms under the Foreign Exchange Management (Guarantee) Regulations, 2000. If the resident service exporter is a public sector operation or a government undertaking, the guaranteed maximum is USD 1,000,000.
Other transactions are not subject to any restrictions under the said regulations.
e) Currency/currency notes export, import, and holding
The 2015 Foreign Exchange Management (Export and Import of Currency) Regulations imposed the following restrictions:
- For the export of currency/currency notes: A person residing in India may carry Indian currency notes outside of India (other than Nepal and Bhutan) up to a total value of Rs. 25,000 per person.
- A person residing in India may take or mail up to two commemorative coins outside India (except Nepal and Bhutan).
- To import currency/currency notes, a person who is a resident of India and has gone out of the country on a temporary visit may carry currency notes from India worth up to Rs. 25,000 per person when he returns (from a place other than Nepal and Bhutan)
- The total value of foreign exchange carried into India in currency notes, banknotes, or travellers’ cheques by any single person is limited to USD 10,000. (or it is equivalent)
- The total value of foreign currency notes carried into India at one time by any individual is up to USD 5,000. (or it’s equivalent).
- Individuals travelling from India to Nepal or Bhutan may take Indian cash notes of denominations of Rs. 500 and Rs. 2,000 up to a limit of Rs. 25,000.
- Apart from those mentioned above, Indian currency notes may be taken or sent out of India to Nepal or Bhutan (other than notes of denominations of above Rs. 100)
- From Nepal or Bhutan, a person may carry goods into India. Notes of money (other than notes of denominations of above Rs. 100)
- The Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2015, limit the number of currency notes held.
Foreign exchange in currency notes, banknotes, and travellers’ checks up to USD 2,000 (or equivalent) in total, subject to acquisition in the modes stipulated by the regulations mentioned above.
(k) A person residing in India sells and buys foreign exchange and commodity derivatives in India and abroad.
Foreign Exchange Management (Foreign Exchange Derivatives Contracts) Regulations, 2000 govern such transactions.
What are some examples of services found in a capital account?
The following transactions are considered in addition to non-financial and non-produced asset transactions:
- Debt forgiveness
- Migrants transfer goods and financial assets when they leave or enter a country.
- The sale or acquisition of fixed assets and the transfer of ownership and monies are received for the sale or purchase of fixed assets.
- Inheritance and gift taxes
- Patents, copyrights, and royalties are all examples of death taxes.
- Damage to fixed assets that are not covered by insurance
The current account will be credited if goods or services are exported, while the account will be debited if goods or services are imported. In contrast to a capital account, if a foreign country purchases machinery, the capital account will be debited; however, if a foreign country purchases a building, the account will be credited.
The total of both accounts is the Balance of Payment. Aside from the disparities between the two balance of payment accounts, if one account shows a surplus, the other will show a deficit and vice versa, but both accounts will eventually balance.