How a Balance-of-Payments Crisis Develops

A location-independent explainer. A balance-of-payments crisis is not a single event but a run on the external account: reserves fall as the currency is sold to defend its value, until financing the deficit becomes impossible at the prevailing exchange rate. The mechanics run in a fixed sequence. A current-account deficit has to be financed by inflows — foreign investment, borrowings, remittances — and when those inflows reverse, the deficit still has to be paid for out of reserves. What turns a strain into a crisis is the combination of a wide deficit, a large share of short-term debt, and reserves that cover too few months of imports. The RBI’s own rule of thumb is that every $10 a barrel rise in crude adds roughly 49 basis points to inflation and $13–14 billion to the annual import bill. India’s position in 2026 illustrates the strain without the crisis: the current-account deficit widened to $4.2 billion in the June quarter, foreign portfolio investment swung to a net outflow of $9.6 billion, and reserves fell $8.1 billion on a balance-of-payments basis — while the central bank described it as a stress test passed rather than a break.