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Question

Difficulty: MediumIndustrial Policies, Infrastructure Sector, Balance of Payments, and External Trade

In external sector accounting, a Non-Resident Indian (NRI) deposits funds into a Non-Resident External (NRE) bank account maintained with a commercial bank in India. Under India's Balance of Payments (BoP) framework, how is this financial inflow classified?

  1. As a credit entry under Banking Capital within the Capital AccountAnswer
  2. B
    As a credit entry under Secondary Income (unilateral transfers) within the Current Account
  3. C
    As a credit entry under Primary Income (compensation and investment return) within the Current Account
  4. D
    As a credit entry under Foreign Direct Investment (FDI) within the Capital Account

Answer

NRI deposits into NRE account schemes are recorded as credit entries under Banking Capital within the Capital Account of India's Balance of Payments.
The correct answer highlights that NRE bank deposits represent repayable debt liabilities managed by the commercial banking system. In Balance of Payments accounting, all cross-border financial flows that change foreign asset or liability positions are recorded under the Capital Account, specifically under the 'Banking Capital' sub-component.

Step-by-Step Solution

1
Identify the economic nature of Non-Resident External (NRE) deposit accounts
NRE accounts represent foreign currency debt liabilities owed by Indian commercial banks to non-residents.
Because funds in deposit accounts are repayable to the account holder upon request, they create financial claims and liabilities across international borders.
2
Distinguish between Current Account and Capital Account transactions in Balance of Payments
Current Account records trade in goods, services, primary income, and secondary transfers. Capital Account records transactions altering external financial assets and liabilities.
Deposit balances represent cross-border debt liabilities rather than unrequited transfers or trade in services.
3
Classify the transaction under the specific BoP capital head
Cross-border banking liabilities are categorized under Banking Capital inside the Capital Account.
Commercial banking channels handling foreign deposit schemes fall under Banking Capital, distinct from FDI, FPI, or External Commercial Borrowings (ECB).

Key Concept

Classification of Banking Capital and NRI Deposits in Balance of Payments Accounting
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Topics

Industrial Policies, Infrastructure Sector, Balance of Payments, and External Trade