BOP on Capital Account:
BOP on Capital Account shows only export and import of capital and the difference between the two represents a country's capital account balance. Capital account is important because movements in capital decides the sustainability of current account deficit as well as exchange rate trends. In India, capital inflows or outflows mainly take place in the form of FDI and portfolio investment, commercial loans and banking capital (NRI deposits including). FDI inflows or outflows are with the intention of buying physical assets to start a business in the home country or abroad on long term basis. Portfolio investment with a view to buying financial assets in securities markets and NRI depasits/withdrawal show short-term capital movement. External commercial borrowings are undertaken both by government and private sectors from bilateral, multilateral and private sources either on short or long term basis. Banking capital records changes in foreign assets and liabilities of the Indian banks authorised to deal in foreign exchange.
Capitalinflows increase the banks' liabilities (credit item) while outflows are their assets and enter debit items in their accounts. Further two minor items -rupee debt service to repay foreign debt in rupees and other capital accruing on account of delayed receipts of exports - are part of capital account. After adjusting for errors and omissions we get an overall balance, which is nothingbut sum of current and capital account transactions. Under IMF transactions,loans from that organisation are a credit item while repayments are a debitentry in our books.
Drawing down from and accretion to foreign exchangereserves act balancing entry to meet deficit or show surplus respectively elsewhere in BOP. Putting all the entries together, it is to be remembered that the "Balance of Payments always Balances". A related question is about BOP Equilibrium which requires that any deficit on the current account be matched by an equal surplus on the capital account and vice-versa.