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Capital Account covers
It includes capital flows from rest of world
minus
Capital flows to rest of world
These include Transactions between Residents and Rest of World
which causes change in asset/liability status
of government or Residents
Capital flows transactions may be of form Deposits, Borrowings or Investment
Example of Capital Account Transactions
Borrowings are of following 2 types
-
External Assistance
It includes loan taken from foreign governments
-
External Commercial Borrowings
It includes Borrowings from Foreign Banks or other institutions
These borrowings may be of govt or of private sector
Investment is of following types
Foreign Direct Investment
Investment Made by person in foreign country like
(Setting up of business/factory in foreign country)
Portfolio Investment
Investing in shares of Foreign Countries or purchase of bonds of foreign country.
It may also include Investment in Real estate or other assets of foreign country
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Deposits are of following 2 types:
Non Residents may hold deposits in Indian Banks in various accounts like
NRO Account, NRE Account, FCNR Account
Similarly Indian Investor may hold deposit in Foreign Account
What is Net Capital Flow?
It means
capital flows from rest of world
minus
Capital flows to rest of world
If net capital balance is positive, it means there is capital surplus
If net capital balance is negative, it means there is capital deficit
Note
A current Account deficit is financed by Net Capital flows
NCERT Questions
No questions in this part
Other Books
Question 1
In the following questions, select the correct answers:
Import of Machinery' is recorded in the ____ account and 'Borrowings from abroad'
is recorded in the ___ account.
- Current, Capital
- Capital, Current
- Current, Current
- Capital, Capital
A. Current, Capital
Explanation
Current Account includes import and export of goods, services and unilateral transfers.
Capital flows transactions may be of form Deposits, Borrowings or Investment.
Here the transaction is 'Borrowings from Abroad' so it is recorded under Capital Account.
Question 2
A company located in India receives a loan from a company located abroad.
How is this transaction recorded in India's BOP account?
- Credit side of Current Account
- Credit side of Capital Account
- Debit side of Current Account
- Debit side of Capital Account
B. Credit side of Capital Account
Explanation
Capital flows transactions may be of form Deposits, Borrowings or Investment.
Here the transaction is borrowings from abroad so it is recorded under capital account.
Amt Received from foreign countries are credited (shown as positive figure).
Oswaal Questions
Question 1
An Indian real estate company receives rent from Google in New York.
This transaction would be recorded on ______________ side of _____________ account.
- credit, current
- debit, capital
- credit, capital
- debit, current
A. credit, current
Explanation
It is an inflow of money and it is recurring in nature.
Question 2
A company located in India receives a loan from a company located abroad.
How is this transaction recorded in India's Balance of Payments Account?
- Credit side of current account
- Debit side of current account
- Credit side of capital account
- Debit side of capital account
C. Credit side of capital account
Explanation
It is an inflow of money in Indian economy.
