State the components of capital account of balance of payments.
Capital Account of Balance of payment (BOP) refers to that account of BOP, which records all the transactions that cause a change in the status of assets and liabilities of the government or any of the residents of a country.
The following are the components of capital account of BOP.
- Foreign Direct Investment (FDI) and Portfolio Investment: Foreign Direct Investment refers to the investment in the assets of a foreign country that allows control over the asset. On the contrary, Portfolio Investment refers to the investment in the assets of a foreign country without any control over that asset. Both FDI and portfolio are non-debt creating capital transactions. They cause an inflow of foreign exchange into the country. Thus, they are recorded as positive items in the Capital Account of BOP.
- Loans and Borrowings: A country takes loans and borrowings from the foreign countries and from the international monetary transactions. Loans and borrowings are debt-creating capital transactions.They result in inflow of foreign exchange into the country. Hence, they are recorded as positive items in the Capital Account of BOP.
- Banking Capital Transactions: Banking capital transactions refer to the transactions of external financial assets and liabilities of the commercial banks and cooperative banks that operate as authorised dealers in the foreign exchange market.
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