Presentation by Anoopa Narayanan Anumol T K Sudeep M Syamlal C S Varun Vasudevan
BALANCE OF PAYMENTS•It is s a macro level statement showing inflow and outflow offoreign exchange•The system of recording is based on the concept of doubleentry book keeping- where the credit side shows the receipt offoreign exchange from abroad and debit side shows thepayments in foreign exchange to foreign residents.
•Receipts and payments are compartmentalized into 2 heads •Current account •Capital account•Basic distinction between the two is that former representstransfer of real income and latter accounts only for transferof funds without effecting a shift in real income.
CURRENT ACCOUNT•It is the part of BOP showing the flow of real income orforeign exchange transactions on account of trade of goodsand invisibles.•The current account records the receipts and payments offoreign exchange in the following ways.
Current account receipts1. Export of goods2. Invisibles a) Services b) Unilateral transfers c) Investment income3. Non-monetary movement of goldCurrent account payments1. Import of goods2. Invisibles a) Services b) Unilateral transfers c) Investment income3. Non-monetary movement of gold
•Export of goods effects the Inflow of foreign exchange intothe country, while import of goods causes outflow of foreignexchange from the country.•The difference between the two is known as the Balance OfTrade. If export exceeds import ,balance of trade is surplus. If import exceeds export ,balance of trade is deficit.•Trade in services, the unilateral transfers and the investmentincome form the ‘invisibles’.
•Trade in services includes receipts and payments on accountof travel and tourism, financial charges concerningbanking, insurance, transportation and so on.•Unilateral transfers include pension, remittances, gifts and other transfer for which no specific services are rendered. They are called unilateral transfers because they represent the flow of funds only in one direction. They are unlike export and import, where goods flow in one direction and the payment flows in the other.•Investment income include interest, dividend and other suchpayments and receipts.
Non monetary movement of goldThere are 2 types of sale and purchase of gold.1. One is termed as monetary sale and purchase that influence the international monetary reserves.2. The other is non monetary sale and purchase of gold this is for industrial purposes and is shown in the current account, either separately from or along with trade in merchandise.The debit and credit sides of two accounts- trade in merchandiseand invisibles – are balanced. oIf credit side>debit side current account surplus oIf debit side> credit side current account deficit
CAPITAL ACCOUNT•It is the part of bop statement showing flow of foreignloans/investments and banking funds•Capital account transactions takes place in the following ways:Capital account receipts1. Long term inflow of funds2. Short term inflow of fundsCapital account payments1. Long term outflow of funds2. Short term outflow of funds
•The flow of capital account is long term as well as short term. •Long term flows involves maturity over one year •Short term flows are effected for one year or less.•The credit side records The official and private borrowing from abroad net of repayments Direct and portfolio investment Short term investments into the country The bank balances of non residents held in the country.•The debit side includes disinvestment of capital country’s investment abroad loans given to the foreign government or a foreign party the bank balances held abroad.
•The difference between credit side of the current account alongwith the credit side of long term capital account transactions iscompared with the transactions on the debit side of current accountand the long term account is known as the basic balance, whichmay be negative or positive.•As per the practice adopted by the RBI, basic balance is notshown in the BOP statement.•The capital account balancing is not complete with the basicbalance•The debit side and credit side of short term capital transactions areadded to respective sides.•Difference between these sides is known as Capital AccountBalance
•Errors and omissions is an important item on the BOPstatement and taken into account for arriving at the overallbalance.•Also known as statistical discrepancy•Statistical Discrepancy refers to estimate of foreign exchangeflow on account of either variations in the collection of relatedfigures or unrecorded illegal transaction of foreign exchange.
•It arises on different accounts It arises because of the difficulties involved in collecting BOP Data. There are different sources of data, which sometimes differ in their approach.For example: In India, trade figures compiled by RBI and theDGCIS(Director general of commercial intelligence andstatistics) differ. The movement of funds may lead or lag the transactions that they are supposed to be finance.For example: goods are shipped in March but payments arereceived in April.
Certain figures are derived on estimatesFor example: figures of earning on travel and tourism areestimated on basis of sample Cases. If sample isdefective, errors are sure. Unrecorded illegal transactions either on debit side or credit side or both
•After the statistical discrepancy is located,the overall balance isarrived at.•Overall balance represents the balancing between the credititems and the debit items appearing on the currentaccount, capital account, and the statistical discrepancy.•If the overall balance of payments is in surplus, the surplusamount is used for repaying the borrowings from the IMF andthen the rest is transferred to the official reserves account.•On the contrary, when the overall balance is found deficit, themonetary authorities arrange for capital flows to cover up thedeficit.
•Such inflows may take the form of drawing down of foreignexchange reserves or official borrowings or purchases fromthe IMF.•From this point of view, capital flows are bifurcated intoautonomous and accommodating ones.•Accommodating or compensatory capital flow is theinflow of foreign exchange to meet the balance of paymentsdeficit, normally from the IMF . On other words, it aim atputting the balance of payments in equilibrium.•Autonomous capital flow refers to flow of loans/investmentin normal course of a business.
OFFICIAL RESERVES ACCOUNT•Official reserves are held by the monetary authorities of acountry.•They comprise monetary gold, SDR allocations by theIMF, and foreign currency assets.•Foreign currency assets are normally held in form of balanceswith foreign central banks and investment in foreigngovernment securities.
•If the overall BOP is in surplus, it adds to the officialreserves account.•If overall BOP is in deficit, and if accommodating capitalis not available, the official reserves account is debited bythe amount of deficit.
BALANCE OF PAYMENTS•Balance of Trade= Export of Goods – Import of Goods•Balance of Current Account= Balance Of Trade + NetEarnings on Invisibles•Balance of Capital Account = Foreign Exchange Inflow –Foreign Exchange outflow, on account of foreigninvestment, foreign loans, banking transactions, and othercapital flows•Overall Balance of Payments = Balance of Current Account +Balance of Capital Account + Statistical Discrepancy
•India’s external sector witnessed further improvement withthe recovery seen in the global economy as reflected in theturnaround in exports, buoyancy in capital inflows andfurther accretion to the country’s foreign exchange reserves.• Exports recovered from 12 months of consecutive declineand posted an average growth of 20.5 per cent duringNovember 2009-February 2010.•Imports also turned around and exhibited an averagegrowth of about 43.0 per cent during December 2009-February 2010, mirroring the impact of strong recovery ingrowth.
•India’s balance of payments position during April-December 2009 remained comfortable with a modestincrease in current account deficit, despite a lowertrade deficit, on account of decline in invisibles surplus.•There has been a turnaround in capital inflows, mainly ledby portfolio inflows, reflecting the buoyant growthprospects of the Indian economy.•India’s foreign exchange reserves during 2009-10increased by US$ 27.1 billion to reach US$ 279.1 billion asat end-March 2010.•As on April 9, 2010, foreign exchange reserves stood atUS$ 280.0 billion.
The impact of global economic recovery was visible in different accountsof India’s balance of payments.The current account position during the third quarter of 2009-10witnessed a turnaround in both exports and imports.India’s merchandiseexports (on BoP basis) registered a robustgrowth in the third quarter of 2009-10 ascompared with decline in the correspondingperiod of 2008-09.Imports (on BoP basis)increased moderately during the quarter ascompared with a higher growth in thecorresponding quarter of the previous year.Trade deficit was lower during the thirdquarter of 2009-10 as compared with thepreceding quarter and the correspondingquarter a year ago.During April-December2009 also, trade deficit remained lower (US$ 89.5 billion) as compared with thecorresponding period of the preceding year(US$ 98.4 billion) led by decline in bothoil and non-oil imports (Table III.5).
InvisiblesThe robust growth observed ininvisibles receipts and payments in the past few years wasreversed during 2009-10, reflecting the lagged impact ofthe recession in advanced economies.The decline wasseen in both factor and non-factorcomponents.Although software exportswitnessed a turnaround, the decline in nonsoftwareExportsDespite lower trade deficit, the fall ininvisibles surplus led to marginally highercurrent account deficit during the thirdquarter of 2009-10The currentaccount deficit during April-December 2009stood at US$ 30.3 billion, higher than US$27.5 billion during April-December 2008.During 2008-09, current account deficit asa per cent of GDP stood higher at 2.4 percent as compared to 1.3 per cent a year ago.
Capital AccountCapital flows continued to remainbuoyant during the third quarter of 2009-10, mainlyled by large inflows under foreign directinvestments, portfolio investments and short-termtrade creditsThe latest available informationon certain indicators of the capital accountindicates that the revival in capital inflows,which started at the beginning of 2009-10and gathered momentum in the second andthird quarters, has remained buoyant evenin the last quarterStrongerrecovery in 2009-10 ahead of the global economycoupled with positive sentimentsof global investors about India’s growthprospects are the factors that underlie themomentum of sustained capital inflowsduring the year.
During 2009-10, India’s foreignexchange reserves increased by US$ 27.1billion to reach US$ 279.1 billion as at end-March 2010Foreign currency assets (FCAs) increasedby US$ 13.3 billion during the year.the Reserve Bank purchased200 metric tonnes of gold from the IMFon November 3, 2009 as part of the ReserveBank’s foreign exchange reservemanagement operations.The foreignexchange reserves, however, remainedunaffected by this transaction as it merelyreflected substitution of foreign currencyassets by gold.The IMF made additionalallocations of SDRs to India in twotranches, viz., general allocation of SDR3,082 million (equivalent to US$ 4.82
Both long-term and shorttermdebt increased at end-December2009 from their levels at end-March2009. Of the total increase in India’sexternal debt at end-December 2009, thevaluation effect on account ofdepreciation of US dollar against majorinternational currencies accounted for36.9 per cent.
India’s external sector, thus,improved alongside the recovery in globaleconomy and further stabilisation in global financial conditions.This wasreflected in the turnaround in exports andcontinued buoyancy in capital inflows.Despite higher net capital inflows during2009-10, reflecting improved absorptivecapacity of the economy, capital inflowsmostly financed the higher current accountdeficit.Reflecting easy global liquidityconditions and both interest rate and growthdifferentials in favour of India, capital inflows are expected to bestrong, which mayput pressure on asset prices and exchangerate. Global commodity price trends,particularly possible firming up of oil pricescould exert pressures on the balance ofpayments through higher imports. Fordealing with the external shocks