Describe the components of the Capital Account of BOP.

The components of capital account of BOP (Balance of Payment).

  • Private Capital Flows
  • Banking
  • Official Capital Flows

Private Capital Flows.

Private capital flows represent private transactions that are affecting assets or liabilities held by individuals, business etc. and other non-government entities. Private capital flows are grouped into two categories

  • Long-term and
  • Short-term.

Short-term private capital flows represent short-term borrowings and investments i.e. borrowings and investments maturing within a period of less than one year. Long-term private capital flows represent borrowings and investments maturing after a period of one year capital outflows i.e. investments by residents in shares and other financial assets abroad are debit entries, while capital inflows i.e. investments by non-residents in country’s shares and other financial assets are credit entries. Following are examples of capital inflows and capital outflows:

Examples of Capital Inflows.

  • Loans from foreign nationals excluding banking institutions.
  • Investment by foreigners in Indian companies.
  • Repayments of loans by non-residents to nationals.
  • Repatriation of country’s investments abroad.
  • Deposits in non-resident rupee accounts.

Examples of Capital Outflows.

  • Investment by residents in shares and other financial assets abroad.
  • Repayment of foreign loans by residents.
  • Repatriation of foreign investments in India.
  • Loans made to non-residents.

Banking.

A new category “Banking” has been created to cover capital movements, in banking sector. Banking sector covers commercial banks whether privately owned or government owned and cooperative banks. All capital movements i.e. changes in foreign assets and liabilities of banks will be shown in this heading. Capital inflows. i.e. decrease in assets and increase in liability are credit items while capital outflows i.e. increase in assets and decrease in liability are debit items.

Official Capital Flows.

Official capital flows represent transactions that are affecting assets or liabilities held by the government and its agencies say Reserve Bank of India. However, this category does not cover transactions relating to official reserve assets. For example, government’s transactions with International Monetary Fund (IMF) are shown in a separate account and not in this category. Official capital flows are grouped into three categories:

  1. Loans
  2. Amortizations
  3. Miscellaneous

Loans received by the Government of India from foreign governments and international institutions are treated as credit entries and amortization or repayment of such loans as debit.

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