Previous Year Question
With reference to Balance of Payments, which of the following constitutes/constitute the Current Account?
Balance of Trade
Foreign Assets
Balance of Invisibles
Special Drawing Rights
Select the correct answer using the code given below.
1 only
2 and 3 only
1 and 3 only
1, 2 and 4 only
Correct Answer: C
Detailed Solution
The Balance of Payments—BoP is a systematic record of economic transactions between the residents of a country and the rest of the world during a specified period.
Statement 1: Balance of Trade—Correct
The Balance of Trade is the difference between the value of merchandise exports and merchandise imports:
Balance of Trade = Merchandise Exports - Merchandise Imports
When exports exceed imports, there is a trade surplus. When imports exceed exports, there is a trade deficit.
Exports and imports of goods form part of the current account.
Statement 2: Foreign Assets—Incorrect
The purchase or sale of foreign assets changes a country’s external financial assets and liabilities. Such transactions are, therefore, recorded in the financial account, not the current account.
Examples include:
Direct investment abroad.
Purchase of foreign securities.
Foreign loans and deposits.
Changes in reserve assets.
Older Indian textbooks and official presentations often used “capital account” as a broad expression. Under the modern IMF classification, most such transactions are classified under the financial account.
Statement 3: Balance of Invisibles—Correct
Invisibles are international transactions that do not involve the physical movement of merchandise goods.
They principally include:
Services such as software, transport, tourism, banking and insurance.
Interest, dividends and profits on cross-border investment.
Compensation of employees.
Workers’ remittances and other unilateral transfers.
In the RBI’s traditional BoP presentation, invisibles are broadly divided into services, income and transfers. They form part of the current account.
Statement 4: Special Drawing Rights—Incorrect
Special Drawing Rights—SDRs are international reserve assets created by the IMF. A country’s SDR holdings form part of its reserve assets and are not a component of the current account.
When the IMF makes an SDR allocation:
The country’s SDR holdings increase as a reserve asset.
A corresponding liability relating to the SDR allocation is also recorded.
Their accounting is associated with the financial account and reserve assets, rather than the current account.
Present classification
Under the IMF’s Balance of Payments Manual, the current account has four principal components:
Goods
Services
Primary income
Secondary income
Under the older broad classification, this can be understood as:
Current Account = Balance of Trade + Balance of Invisibles
Therefore, only the Balance of Trade and Balance of Invisibles constitute the current account.
Current position (2026)
The RBI continues to provide detailed merchandise-trade and invisibles data in India’s BoP statistics. Under modern international classification, however, the capital account and financial account should be distinguished:
Capital account: Capital transfers and non-produced non-financial assets.
Financial account: FDI, portfolio investment, loans, deposits and reserve assets.