How to Read India’s FX Reserves and Balance of Payments Data

An external release is read in a fixed order: the current account, then the capital account split by kind, then the change in reserves, then the level, then cover with its unit named. The order is the method, because a level is a stock, a stock moves for several reasons at once, and reading it first establishes that it moved and nothing at all about why.

The reading order rests on three things set out elsewhere. One is the pair of accounts themselves, the current accountEverything a country sold abroad and bought from abroad over a period, plus the income and the money sent home that crossed with it. Its contents are set out separately. and the capital accountWhat crosses a border over a period as a claim instead of as earnings: stakes bought, securities held, loans made and repaid. Set out separately.. Another is the reserve stock together with the cover figure it produces, also covered separately. The last is the sorting of foreign money into kinds, foreign direct investmentForeign money arriving to build something, or to hold a lasting stake in a business, instead of sitting in securities. Sorted against the other kind separately. on one side and portfolio investmentForeign money parked in securities that trade, so it can be sold and sent home at short notice. Sorted against the other kind separately. on the other. The order those three get picked up in is what the reading adds, together with the output every step has to hand over before the next step is allowed to begin.

A real reading of this kind begins at the Reserve Bank of India and at the external data releases it publishes. Every figure worked through below belongs instead to the Republic of Sankhya, an invented country trading with an invented partner called Marut. Invented numbers hold still while a reading order is being learned on them.

Why does the order matter more than any single step?

Something closer to home than a country makes the point. A household bank balance is higher at the end of the month than it was at the start, by Rs 3,000/-. Which of those things happened? The balance alone cannot say. Somebody may have worked overtime, somebody may have skipped a purchase, a relative may have repaid an old loan, and the electricity bill may simply have arrived late. The balance is a single number sitting at the end of a month in which several different things happened at once, and it has quietly added all of them together and thrown away the parts.

A reserve level behaves exactly like that balance. The reading order puts it fifth and not first. Foreign exchange reserves are a stock: a quantity standing at a moment. The two accounts are flows: quantities that happened over a period. Reading the stock before the flows leaves a number that moved, with no way to say which of the several things that moved it did the moving. Reading the flows first means that by the time the stock arrives, the movement already has names attached to it.

The seven steps are not a list of things worth looking at. The steps are an order, and the order carries the whole method. Each step is an action, each action produces something written down, and the next step is allowed to use only what the last one produced. Working under that restriction is what stops a reading from becoming an opinion halfway through. No step below explains anything: where an explanation is wanted, the step names where it lives and moves on.

What does step one take, and what does it hand over?

Step one takes the current account. The action is small enough to describe in a line: find the current account balance for the period, write the amount, write beside it the word surplus or the word deficit, and then divide the amount by the output measureThe headline figure for everything an economy produced in a period, used here only as something to divide by. How it is built and how often it is revised is covered separately. for the same period and write that as a share. Three things go down on the sheet and nothing else does. On the Sankhya release used throughout this guide, step one hands over a deficit of Rs 14,000 crore, set beside Sankhya output of Rs 17,47,200 crore as a share of 0.80 per cent.

The direction is written as a word rather than carried by a sign. A minus sign is the easiest mark on a sheet to skim past, and a reading that skims past it has inverted its own first output. Step one records what the country earned and paid out across its border, states the direction in words, and sets it against the size of the economy, and it does not go one inch further than that. Whether a deficit of that size is comfortable, unusual, or anything else is not a question step one is permitted to touch, and this reading order never gets around to it.

The share does something specific. Rs 14,000 crore is a quantity with no scale attached. As soon as it becomes 0.80 per cent of output it is a quantity with a size, and the same arithmetic works whether the country is Sankhya or anywhere else. A household makes the same move when it stops saying the electricity bill was Rs 4,000/- and starts saying the electricity bill was a fifth of what the household earned that month. The amount did not change. The amount can now be compared with something, and that is the whole of the change.

Why is the capital account split before it is totalled?

Step two takes the capital account, and the action has two parts in a fixed order: split it by kind first, then add it up. On the Sankhya release, the split gives Rs 22,000 crore of direct investment coming in, Rs 6,000 crore of portfolio investment going out, and Rs 3,000 crore of other external borrowingMoney a country takes in as loans from abroad rather than as an investment stake, so it is owed back. Its contents are set out separately. coming in. Only after those three are on the sheet does the total go down, at Rs 19,000 crore coming in. Four things are handed over, and the order in which they were written is part of what was handed over.

The split comes before the total for exactly the reason the flows come before the stock: a total is an addition, and an addition destroys the parts that went into it. Look at what the Sankhya total conceals. Rs 19,000 crore came in on net, and a reader who writes only that has no way of knowing that Rs 6,000 crore left the country during the same period. The account is in surplus and money is leaving, both at once, and the total is the single entry on that sheet incapable of showing it. Write the parts down first and the fact is preserved. Write the total first and it is gone, and no amount of staring at Rs 19,000 crore will bring it back.

Think of a shopkeeper who counts the till at closing and finds Rs 19,000/- more than at opening. The closing difference is true and useless on its own. The day contained sales, refunds and a supplier who was paid in cash. The shopkeeper who writes the three streams down before adding them can answer a question tomorrow. The one who writes only the closing difference has kept a number and thrown away the day. The two kinds of foreign money, and why one behaves differently from the other, are covered separately. Step two only requires that they arrive on the sheet separately.

Is the change in reserves a check, or something else?

Step three adds the two amounts already on the sheet. A deficit of Rs 14,000 crore on the current account and Rs 19,000 crore coming in on the capital account give a change in reserves of Rs 5,000 crore added over the period. One amount goes down, and beside it goes one word: identity. The word identity is the entire second half of the output, and leaving it off is the commonest way this step gets written down wrongly.

The two accounts and the reserve change are one relationship written two ways, and two writings of one relationship can never disagree. Label the change an identity. A sum that cannot come out wrong is not confirming anything when it comes out right. Why the relationship holds, and what it means that the residual has already been swept into a line called errors and omissionsThe line an external statement uses to absorb whatever the two sides of it did not match by, so the statement adds up. Its contents and its origin are covered separately., is built elsewhere and this step does not go there. Step three writes the amount, writes the word, and stops.

The practical cost of missing the label is easy to picture. Somebody adds the two accounts, gets the reserve change on the nose, and feels the quiet satisfaction of a reconciliation that tied out. Nothing tied out. The arithmetic was going to agree whatever the underlying figures were, in the same way that counting the same pile of coins twice will agree twice. A genuine cross-check has to come from somewhere outside this sum, and this reading order does not supply one.

What happens to the part of the change that cannot be attributed?

Step four takes the Rs 5,000 crore change and splits it into named parts. The action is mechanical: go back to what steps one and two put on the sheet, and set each piece against the change. The current account took Rs 14,000 crore out. Direct investment put Rs 22,000 crore in. Portfolio investment took Rs 6,000 crore out. The three named parts come to Rs 2,000 crore added. The change actually was Rs 5,000 crore. Rs 3,000 crore is left over, and step four writes it on a row of its own.

The leftover row is where the whole step earns its place. Rs 3,000 crore is what the capital account holds once the two kinds this reading sorts have been taken out of it, and this reading does not break it down any further. So it goes down under its own heading, as a remainder, unassigned. A remainder is written on its own row and given its own name, and it is never folded into the largest line that happens to share its sign.

Watch how easy the wrong move is. Direct investment came in at Rs 22,000 crore, the remainder came in at Rs 3,000 crore, and both are additions. Sliding one into the other feels like tidying up. Sliding one into the other produces a direct investment figure of Rs 25,000 crore. Nobody published that number, and it will sit on a sheet read later by somebody who has no way of knowing it was assembled. The remainder was small and the invented figure looks reasonable, and that combination is exactly what makes the habit dangerous rather than harmless.

An everyday version: a household reconciles the month's spending, names the rent, the school fee and the groceries, and finds Rs 1,200/- unaccounted for. The unaccounted amount could go against groceries. Groceries is the biggest line and nobody would query it. Or it could be written as "Rs 1,200/- not identified" and left standing. The unidentified row is uncomfortable to look at and is the only version that stays true when somebody asks about it in March. Step four takes the second option every time.

When does the reserve level finally get taken?

Step five, and not before. The action is to write the level of foreign exchange reservesThe pile of foreign currency assets a central bank sits on. Its contents, and the reasons for keeping it, are set out separately. down, and then to compute one cover figure from it. On the Sankhya release the level is Rs 3,85,000 crore, and since step three already put the change at Rs 5,000 crore added, the level the period opened at was Rs 3,80,000 crore. Sankhya goods imports for the period were Rs 3,85,000 crore, so one month of those imports comes to Rs 32,083.33 crore, and cover works out at 12.00 months. Cover opened the period at 11.84 months.

The cover figure carries the word months every single time it is written, and a cover figure written without its unit is not an output at all. The division is done the safe way: the reserve level multiplied by twelve and divided by the year of goods imports, so the rounding in that monthly figure of Rs 32,083.33 crore never enters the answer. The purpose of reserves, and what a cover figure is trying to describe, is covered separately. Step five computes it, prints the unit, and hands it over.

There is a reason the unit is worth this much fuss, and the Sankhya numbers show it in one line. Set the same Rs 3,85,000 crore of reserves against a whole year of goods imports instead, and out comes 1.00. The answer 1.00 is one year of cover and not twelve months of cover, so 1.00 answers a different question perfectly well. Anybody who writes 1.00 next to the word months has published a figure wrong by a factor of twelve. Print the unit and the mistake stands up and announces itself. Leave the unit off and it travels.

What does a cover figure have to carry with it?

Step six takes the cover figure that step five just produced and does one thing with it: names what sits under the division line, and then holds that name up against whatever question the reading was started for. Sankhya cover of 12.00 months has goods imports underneath it. So the full output of step six is 12.00 months of goods imports, and the last three words are not decoration.

Now put a question to that figure. Suppose the reason anybody opened the release was the Rs 6,000 crore of portfolio money that left during the period, and the question is what would happen if a great deal more of it went the same way. Cover of 12.00 months cannot answer that. Its denominator is a flow of goods bought from abroad, and the question is about a stock of claims that outsiders hold and could sell. A flow of imports and a stock of claims are two different quantities, and no amount of care with the arithmetic turns one into the other. Step six either hands over the cover figure with its denominator named, or hands over a written note that the figure does not answer the question asked, and on the Sankhya release it hands over both.

The Sankhya sheet carries no figure for the stock of claims outsiders hold, so the honest output here is a cover figure and a blank, and the blank is written down as a blank. Handing somebody a blank when they wanted an answer is genuinely uncomfortable, and the blank is still the output. Why reserves are held and what they are meant to cover is covered separately, and step six does not go looking for it.

What would change this reading before the next one?

Step seven writes down two or three conditions that would make the next reading come out differently, and it writes them now rather than after the next release has already landed. Conditions written in advance are a record. Conditions written afterwards are a story about why the reading moved, assembled with the answer already in hand.

Three go on the Sankhya sheet, and each one is a sentence about a mechanism covered elsewhere. If the portfolio line turns from Rs 6,000 crore leaving to money coming in, step four's attribution changes shape even when the change in reserves does not move at all. Imports are the denominator, and step six wrote that down, so if goods imports move the cover figure moves without a single rupee of reserves moving. If the output measure gets revised, step one's share moves away from 0.80 per cent without one external figure changing anywhere.

Every condition on that list names a figure that could move and a step whose output would move with it, and none of them says what anybody should think when it happens. That is the shape a condition has to take to be worth writing. A condition that says the situation could deteriorate has recorded a mood. A condition that says the denominator under step six could move has recorded something that can be checked against the next sheet in ninety seconds.

What does the whole order look like run once, end to end?

Here is the Sankhya release taken through all seven steps without a break, so the sheet fills up in view. The right hand column on its own is the entire product of the reading. Nothing in it explains anything.

Count what came out of that: eight figures, one direction word, one unit, one remainder standing on its own, one written blank and three conditions. Seven steps produced a complete sheet and not a single verdict, and the sheet is finished exactly as it stands. The pull towards adding a sentence at the bottom saying whether all of this looks comfortable is the thing this order is built to resist.

When does the reading stop?

The stopping point is a step, not a feeling. The reading stops when every one of these is written down: the current account with its direction, the current account as a share of output, the capital account split three ways, the capital account total, the change in reserves with the word identity beside it, the attribution with its remainder standing on its own row, the reserve level, the cover figure carrying the word months, the denominator named underneath it, and the conditions. When those exist, the reading is finished. When one of them is missing, it is not, however strong the sense of what is going on.

The order does not manufacture a view about whether reserves are adequate, or about whether a deficit has grown too wide, and the reading never finishes on one. Somebody will ask for one, and the honest answer is that the sheet is the output. Adequacy against what, over what horizon, and against whose claims are all questions that need something the sheet does not carry. Answering them anyway, from a sheet that cannot support the answer, is how a reading turns into an opinion wearing a reading's clothes.

What changes when this release is read for a company rather than a country?

Somebody in equity research, or on a policy desk, or sizing up a lender, is rarely reading an external release for its own sake. The reason is usually that a business they follow buys something from abroad, sells something abroad, or borrows in a currency it does not earn in. The useful thing here is how little of the order changes when the purpose changes.

Steps one, three, four, five, six and seven are identical. The same amounts get taken in the same sequence, the same remainder gets written on its own row, the same cover figure gets its unit and its denominator, and the same conditions get set down in advance. Only step two picks up anything extra, and the extra thing is a question instead of an answer: which of the three kinds of flow is the one that actually funds this business or this sector.

A trader who imports goods and sells them at home cares about a different line from a builder funded by a foreign lender, and both care about a different line from a listed company whose shares outsiders hold. The question gets asked at step two and written on the sheet as a question. Answering it needs the accounts themselves, and the accounts are covered separately. The order makes sure that when the answer arrives, it arrives on a sheet where the parts were never added away.

The Republic of Sankhya and its trading partner Marut are invented.
Educational material. Not advice on any investment, tax, budget or market position.