The capital account and BoP balance

The second part of the BoP is the capital account: transactions in assets.

• Foreign direct investment (FDI): foreigners setting up or buying businesses here.
• Foreign institutional investment (FII): foreign funds buying shares and bonds here.
• External borrowing and external assistance.

Money coming in (foreigners buying our assets) is a credit; money going out (Indians buying assets abroad, such as an Indian firm buying a UK company) is a debit.

A current account deficit must be paid for somehow: by a capital account surplus (net capital inflows), or by using the country's foreign exchange reserves.

Two kinds of transaction:

• Autonomous transactions are made for their own reasons, such as profit. They are 'above the line'.
• Accommodating transactions are made to fill the gap left by the autonomous ones: the central bank's official reserve transactions. They are 'below the line'.

If autonomous receipts are less than autonomous payments, the BoP has an overall deficit, and official reserves fall. Because records are imperfect, the BoP also has an errors and omissions item. (The newer BPM6 format adds a separate financial account.)