Trade, the rupee and the balance of payments

The balance of payments records all transactions between India and the rest of the world. Its current account covers trade in goods and services, income from investments, and transfers such as remittances. Its capital account covers investment flows — foreign direct investment (FDI), portfolio investment, loans and banking capital. A current account deficit means India imports more goods, services and income than it exports, and it must be financed by capital inflows or by drawing on foreign exchange reserves.

India usually runs a deficit on merchandise trade — it imports more goods, especially oil, gold and electronics, than it exports — partly offset by a surplus on services, led by software and business services, and by remittances. According to World Bank estimates, India received about 129 billion dollars in remittances in 2024, the largest inflow of any country, which cushions the current account and supports millions of households. The overall balance therefore depends on several moving parts, not on goods trade alone.

The rupee's value is set mainly by the market, with the Reserve Bank intervening to curb excessive volatility rather than to fix a level — a managed float. A weaker rupee makes exports cheaper and imports dearer, which can help exporters but raises the cost of oil and other imports and can feed domestic inflation. A stronger rupee does the reverse. There is no permanently right level: exporters, importers, borrowers in foreign currency and households all prefer different outcomes, and the RBI's job is stability, not pleasing any one group.

The 1991 crisis is the cautionary tale. When reserves ran low, India had to borrow against its gold and accept an IMF programme. Since then, reserves have been built up as insurance, and the current account deficit has generally stayed within levels the economy could finance. The lesson for policy is that external balance is not about celebrating exports or fearing imports in isolation, but about whether deficits are financed by stable investment and used for productive capacity rather than consumption.