External Sector

It is that sector of an economy which deals with economic activities with the external world. includes export, import, FDI etc.



All of India's transactions with external world fall into either current account or capital account.

Current Account

All the short term transactions are recorded here.

• Import & export (difference is the trade balance)
• Interest from loans
• foreign investment in shares (Portfolio investments)

Maintained by the central bank (RBI) on behalf of the govt.

India had current account surplus only during 2000-2003.

Trade Deficit

It is the monetary value difference between import and export of goods.

Capital Account

All the long term transactions are recorded here.

• FDI
• Long term loans
• issuance of external bonds
• private remittance

There is no deficit or surplus calculation here like the current account.

Convertibility

It is the ability of domestic currency to convert into foreign currency with ease.

India currently allows full convertibility in Current account (after 1991 liberalization) but partial convertibility on Capital Account

Raghuram Rajan says full convertibility will happen in few years, but India requires some curb as of now. 

In May-August 2013, capital control helped the country when fed tapering saw as many as over USD 20 billion being pulled out of the country by foreign investors. It even helped in averting any situation akin to currency meltdown of Asian economies that happened in 1997-98

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