The Balance of Payments (BoP) document summarizes the key components of a country's international transactions including the current account, capital account, and change in foreign exchange reserves. The current account tracks trade balances and investment flows, while the capital account reflects investment flows into and out of the country. The difference between the current and capital accounts determines the change in a country's foreign exchange reserves.

2. BoP is an account of the international
transactions of a country, and shows how the
country is faring in trade, attracting capital from
abroad, and the effect of that on its foreign
exchange reserves.

5. Current Account
The current account shows you the
trade position of the country.
 It shows you the merchandise
imports and exports, and then the
invisibles part of it is also trade but it’s
that part of trade where there is no
physical good exported or imported.
In India’s case, the transfers and
grants part of the invisibles is quite big
relative to other countries because of
the large Indian diasporas.

6. Capital Account
Where current account shows you
trade, capital account can be thought of as
the investments part of the international
transactions.
This is further broken out into equity and
debt investment and the FII money and FDI
money is part of the equity investments while
the external commercial borrowings, money
deposited in banks by NRIs and trade credits
are debt investments.

7. Change in Forex Reserves
The difference between the
Current account and the Capital
account is reflected in the change in
the Forex reserves.
For example, in 2010 – 11 – India’s
Current Account Deficit was $45.9
billion but the Capital Account
Surplus was $62.0 billion and this
resulted in increase in Foreign
Exchange Reserves of $13.1 billion.
 This doesn’t exactly total up due to
the effect of Errors and Omissions.

8. Link between Internal and External
Indicators
X-M = Y-(C+I+G) = (T-G)+(SP-Ip)
 X-M  Current Account Deficit
 Y  Income
 C  Consumption
 I  Investment
 G  Government Expenditure
 T-G  Fiscal deficit
 SP-Ip  Private Saving-investment Gap
C Rangarajan

9. 

a) If a transaction earns foreign currency for
the nation, it is a credit and is recorded as a
plus item.
b) If a transaction involves spending of
foreign currency it is a debit and is recorded
as a negative item.

12.  Occurs
when a country's total imports of
goods, services and transfers is greater than the
country's total export of goods, services and transfers.
This situation makes a country a net debtor to the rest
of the world

13. CAD has hit a historic high of 6.7 per cent in the
December quarter of the fiscal 2012-13 due to highly
subsidised fuel and the voracious appetite for gold

14.  EXCESS DEMAND
 EXCHANGE RATES
(Rs 44 in July 2011 to Rs 54-55 levels)
 CAPITAL FLOWS
(higher capital flows lead to higher CADs but just
when the CAD widened in 2011, there were capital
outflows that made it difficult to finance the CAD)

15.  EXTERNAL SHOCKS
(supply shocks that have sustained high inflation over
2007-13, alongside lower growth)
 POLICY ACTION
( freer import competition without building export
capacity, leading to import growth exceeding that of
exports)
Indian CAD is countercyclical. That is, it rises when
output falls and not when demand rises. GDP growth
has fallen to sub-six per cent levels and industry is
actually faced with a problem of excess capacity

18. Gold import bill will go down by $8 billion because of
the price effect
A fall of $10 per barrel of crude oil will help lower the
net import oil bill by $9 billion
Also WPI may fall to 5.6%
source: Nomura

20. • Measures to address supplyside constraints
• Cabinet
Committee
of
Investments has cleared $14
billion of projects in oil &
gas, coal road and power
sector
• Increased customs duty on
gold

25. 1.Dissuade investment in gold.
2.Reduce dependency on oil.
3.Open the market.
4.Promote exports.
5.Reduce subsidies.
6.Reduce unplanned expenditure in five
year plans.
7.Transparency in governance.
8.Austerity measures

26.  Indian Economy – Mishra and Puri
 Economics – Samuelson and Nordhaus
 www.commerce.nic.in
 www.rbi.org
 www.mrunal.org
 www.anilagashe.blogspot.com
 The Economic Times
 Hindu Business Line