Previous Year Question

The question uses the expression Capital Account in the older and broader sense conventionally used in India. Under this broad classification, it covers transactions that change the country’s external financial assets and liabilities.

1. Foreign loans—Part of the capital account

Loans received from foreign governments, multilateral institutions, foreign banks or other overseas lenders increase the country’s external liabilities.

They may include:

• External Commercial Borrowings—ECBs

• External government borrowings

• Multilateral and bilateral loans

• Foreign borrowing by the banking sector

• Short-term trade credit

Foreign loans are, therefore, capital or financial flows.

2. Foreign Direct Investment—Part of the capital account

Under Foreign Direct Investment—FDI, a foreign investor establishes a lasting interest and a significant degree of influence in an enterprise.

An inward FDI transaction increases India’s foreign liabilities. Similarly, direct investment abroad by an Indian company increases India’s foreign assets. FDI is, therefore, recorded in the financial account.

3. Private remittances—Part of the current account

Private remittances principally include money sent by persons working abroad to their families.

A remittance does not create a corresponding financial asset or repayment liability. It is, therefore, recorded as secondary income or transfer receipts in the current account.

Private remittances are not part of the capital account. Statement 3 is incorrect.

4. Portfolio investment—Part of the capital account

Portfolio investment includes investment by foreign investors in shares, bonds and other marketable securities, generally without seeking control over the enterprise.

Such investment changes the country’s foreign financial assets or liabilities. It is, therefore, recorded in the financial account.

Thus, foreign loans, FDI and portfolio investment form part of the broadly defined capital account, while private remittances belong to the current account. The answer is (b).

Modern classification

Under the IMF’s BPM6:

• Capital Account: Capital transfers and non-produced non-financial assets.

• Financial Account: FDI, portfolio investment, loans, deposits, financial derivatives and reserve assets.

• Current Account: Goods, services, primary income and secondary income—which includes private remittances.

Current position (2026)

The RBI’s Indian BoP presentations classify capital flows under categories such as foreign investment, loans, banking capital and other capital. For international comparison, however, the IMF’s separate classification of the capital and financial accounts is more precise.