External Sector: Chapter test

Computer services, essentially software and IT-enabled services, are the largest category of India's services exports, followed by other business services. The RBI's quarterly BoP releases of 2026 note that services exports rose mainly in computer services and other business services. This large and steady services surplus is the main reason India's current account deficit stays small despite a wide goods deficit.

An ECB creates a liability of an Indian resident to a non-resident, so the money received is a capital (financial) account inflow under loans, and the outstanding amount is part of India's external debt (commercial borrowings are the largest component of long-term debt). Bringing in foreign exchange does not make it a current account credit; only the interest paid later is a current account debit. It is debt, not equity, so it is not FDI, and it belongs to the company, not to the RBI's reserves.

Two of them (items 1 and 3). Section 2(e) of FEMA defines a capital account transaction as one that alters the assets or liabilities, including contingent liabilities, outside India of a person resident in India (or in India of a non-resident). Buying foreign shares creates a foreign asset and borrowing from a Singapore bank creates a foreign liability. Paying for imports and remitting tuition fees are current account transactions under section 2(j): they settle trade in goods and services and do not create a lasting asset or liability.

Statements 1 and 2 are correct. In the RBI's BPM6-format table, reserve assets carry the note '-' : increase; '+' : decrease, because an addition to reserves is a use of foreign exchange, like a debit. Errors and omissions is shown as '(-)(A+B)', the residual that makes all entries sum to zero. Statement 3 is wrong: the residual has no fixed meaning; it can reflect unrecorded receipts, timing differences, valuation or coverage gaps, so a positive figure cannot be pinned to unrecorded exports.

Items 1, 2 and 3 are capital account items in the RBI's standard presentation. Its capital account covers foreign investment (FDI and portfolio), loans (external assistance, commercial borrowings and short-term trade credit), banking capital (of which NRI deposits), rupee debt service and other capital. Item 4 is wrong: personal transfers (remittances) are current transfers and belong to the current account, as private transfers under invisibles. A loan or deposit creates a future claim; a remittance does not.

Rupee debt service records repayments of India's old rupee-denominated debt to the erstwhile USSR, contracted largely for defence and civilian imports under the Rupee Payment Area arrangement and later rescheduled with Russia. Because the debt is denominated in rupees, it is shown separately from foreign-currency loans. Masala bonds and FPI holdings of G-secs belong to commercial borrowing and portfolio investment, and NRO repatriation falls under banking capital.

Statements 1 and 2 are correct. Section 5 of FEMA makes current account transactions free but lets the Central Government impose reasonable restrictions in consultation with the RBI (as in the Current Account Transactions Rules). The Finance Act, 2015 split capital account powers: under section 6(2) the RBI, in consultation with the Government, handles debt instruments, and under section 6(2A) the Government, in consultation with the RBI, handles non-debt instruments such as equity; this took effect on 15 October 2019. Authorisation of dealers is given by the RBI under section 10; the Enforcement Directorate investigates contraventions.

Statements 1 and 2 are correct. Net FDI rose to about USD 6.9 billion in 2025-26 from about USD 1.0 billion in 2024-25, though it remained small relative to gross inflows because of repatriation and outward investment. FPIs turned net sellers, with outflows of about USD 16.4 billion. Statement 3 is wrong: with net capital flows short of the current account deficit, reserves were depleted by about USD 23.6 billion on a BoP basis, even though valuation gains on gold kept the stock of reserves high.