The following are the three broad categories of transactions recorded under capital account of BOP.
(i) Foreign direct investment (FDI) and portfolio investment : Foreign Direct Investment refers to the investment in the assets of a foreign country. By investing, the government or any resident of domestic country owns the control over the asset of the foreign country, On the contrary, Portfolio Investment refers to the investment in the assets of a foreign country without any control over that asset.
FDI and Portfolio Investment cause an inflow of foreign exchange into the country. Thus, they are recorded as positive items in the Capital Account of BOP. It should also be noted that FDI and Portfolio Investment are the non-debtcreating capital transactions.
(ii) Loans and Borrowings : Loans and borrowings by a country from the foreign countries or from the international money market are recorded in the Capital Account of the BOP. These borrowings can be in the form of commencial borrowings or in the form of assistance. When a country borrows with the consideration of assistance, the transaction would involve a lower rate of interest as compared to the prevailing market rate of interest. As against this, commercial borrowings involve open market rate of interest. Loans and borrowings result in inflow of foreign exchange into the country. Hence, they are recorded as positive items in the Capital Account of BOP. Unlike FDI and Portfolio Investments, loans and borrowings are debt creating capital transactions.
(iii) Banking Capital Transactions: Another form of Capital Account transactions are banking capital transactions. Such transactions refer to the transactions of external financial assets and liabilities of the commercial banks and co-operative banks that operate as authorised dealers in the foreign exchange market.