an analysis about the Indian banking system and the analysis of two major banking sector reforms; Narasimham committee (1 and 2) on banking sector reforms
8 key factors that affect foreign exchange ratesannadesoza123
The exchange rate is defined as "the rate at which one country's currency may be converted into another." It may fluctuate daily with the changing market forces of supply and demand of currencies from one country to another.
an analysis about the Indian banking system and the analysis of two major banking sector reforms; Narasimham committee (1 and 2) on banking sector reforms
8 key factors that affect foreign exchange ratesannadesoza123
The exchange rate is defined as "the rate at which one country's currency may be converted into another." It may fluctuate daily with the changing market forces of supply and demand of currencies from one country to another.
Factor Affecting exchange rate and Theories of exchange rate Jatin Goyal
It explains the following topics
Factor Affecting the exchange rate
CURRENCY DEPRECIATION VS.CURRENCY APPRECIATION
Foreign exchange
Theories of exchange rate
The FEMA (1999) or in short FEMA has been introduced as a replacement for earlier Foreign Exchange Regulation Act (FERA)
FEMA came into act on the 1st day of June,2000
49 sections in the Act.
Balance of Payment Disequilibrium and CausesNeema Gladys
1.Balance of Payment
The balance of payment of a country is a systematic accounting record of all economic transactions during a given period of time between the residents of the country and residents of foreign countries.
2.Componets of BOP
Current Account
It includes imports and exports of goods and services and unilateral transfer of goods and services.
Capital Account
Under this are grouped transactions leading to changes in foreign assets and liabilities of the country.
3. Accounting Treatment of Items (Debit and Credit Items)
Any item which gives rise to a sale of foreign exchange (an inflow) is recorded as a credit item (+) in the accounts e.g. export of goods and services
Any item which gives rise to the purchase of foreign exchange (an outflow) is recorded as a debit item (-) in the accounts e.g imports of goods and services.
4. BOP Disequilibrium
BOP is a double entry accounting record, then apart from errors and omissions, it must always balance.
The BOP deficit or surplus indicate imbalance in the BOP.
This imbalance is interpreted as BOP Disequilibrium.
A country’s balance of payments is said to be in disequilibrium when its autonomous receipts (credits) are not equal to its autonomous payments (debits).
5.BOP Deficit
A deficit or an unfavorable balance exists when the value of autonomous debit items exceeds the value of autonomous credit items.
6. BOP Surplus
A surplus or a favourable balance exists when the value of autonomous credit items exceeds the value of autonomous debit items.
Factor Affecting exchange rate and Theories of exchange rate Jatin Goyal
It explains the following topics
Factor Affecting the exchange rate
CURRENCY DEPRECIATION VS.CURRENCY APPRECIATION
Foreign exchange
Theories of exchange rate
The FEMA (1999) or in short FEMA has been introduced as a replacement for earlier Foreign Exchange Regulation Act (FERA)
FEMA came into act on the 1st day of June,2000
49 sections in the Act.
Balance of Payment Disequilibrium and CausesNeema Gladys
1.Balance of Payment
The balance of payment of a country is a systematic accounting record of all economic transactions during a given period of time between the residents of the country and residents of foreign countries.
2.Componets of BOP
Current Account
It includes imports and exports of goods and services and unilateral transfer of goods and services.
Capital Account
Under this are grouped transactions leading to changes in foreign assets and liabilities of the country.
3. Accounting Treatment of Items (Debit and Credit Items)
Any item which gives rise to a sale of foreign exchange (an inflow) is recorded as a credit item (+) in the accounts e.g. export of goods and services
Any item which gives rise to the purchase of foreign exchange (an outflow) is recorded as a debit item (-) in the accounts e.g imports of goods and services.
4. BOP Disequilibrium
BOP is a double entry accounting record, then apart from errors and omissions, it must always balance.
The BOP deficit or surplus indicate imbalance in the BOP.
This imbalance is interpreted as BOP Disequilibrium.
A country’s balance of payments is said to be in disequilibrium when its autonomous receipts (credits) are not equal to its autonomous payments (debits).
5.BOP Deficit
A deficit or an unfavorable balance exists when the value of autonomous debit items exceeds the value of autonomous credit items.
6. BOP Surplus
A surplus or a favourable balance exists when the value of autonomous credit items exceeds the value of autonomous debit items.
Premier University[B.B.A]
International Financial Management
Presentation Subject
EXCHANGE RATE DETERMINATION
Submitted to
Lecturer:Ms.Nilufar Sultana
Department of Finance
Faculty of Business Administration
Premier University, Chittagong.
Semester: 8th Section: “A” Batch :22nd
Group Name: D
International Financial Management
Presentation Subject
EXCHANGE RATE DETERMINATION
Submitted to
Lecturer:Ms.Nilufar Sultana
Department of Finance
Faculty of Business Administration
Premier University, Chittagong.
Semester: 8th Section: “A” Batch :22nd
Department : Finance
Group Name: D
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
If you are looking for a pi coin investor. Then look no further because I have the right one he is a pi vendor (he buy and resell to whales in China). I met him on a crypto conference and ever since I and my friends have sold more than 10k pi coins to him And he bought all and still want more. I will drop his telegram handle below just send him a message.
@Pi_vendor_247
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
Exploring Abhay Bhutada’s Views After Poonawalla Fincorp’s Collaboration With...beulahfernandes8
The financial landscape in India has witnessed a significant development with the recent collaboration between Poonawalla Fincorp and IndusInd Bank.
The launch of the co-branded credit card, the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card, marks a major milestone for both entities.
This strategic move aims to redefine and elevate the banking experience for customers.
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
2. Definition of Foreign Exchange
• According to Hartly Wethers, “Foreign
exchange is the art and science of
international monetary exchange”.
3. Importance of Foreign Exchange
• For availing services such as education,
tourism, healthcare, insurance, banking,
hospitality etc
• For import purposes
• Transfer of purchasing power
• Transfer of funds
4. Foreign Exchange Regulation Act
• Legislation passed by the Indian paliament in
1973, and came into force from January 1, 1974
• Consisted of 81 sections
• Emphasized strict exchange control
• Control everything that was specified, relating to
foreign exchange
• Law violators were treated as criminal offenders
• Aimed at minimizing dealings in foreign exchange
and foreign securities
5. Objectives of FERA
• To regulate certain payments
• To regulate dealings in foreign exchange and
securities
• To regulate transactions, indirectly affecting
foreign exchange
• To regulate import and export of the currency
• To conserve precious foreign exchange
• To promote economic development of the
country
6. Foreign Exchange Management Act
(FEMA)
• Introduced as a replacement of FERA in 1999
• Contains 49 sections
• Violation of FEMA is a civil offence
• More concerned with management than
regulation or control
• Regulatory mechanism that enables the RBI
and Central government to pass regulations
and rules relating to foreign exchange in tune
with the Foreign Trade Policy of India
7. Objectives of FEMA
• Promoting orderly development and
maintenance of Foreign exchange market in
India
• Facilitate external trades and payments
• Consolidate and amend the law relating to
foreign exchange
• To remove imbalance of payments
• Regulation of employment business and
investments of non-residents
8.
9.
10. Foreign Exchange Market
• According to Ellsworth, “A foreign Exchange
market comprises of all those institutions and
individuals who buy and sell foreign exchange
which may be defined as foreign money or any
liquid claim on foreign money”.
11. Functions of Foreign exchange Market
• Transfer Function
• Credit Function
• Hedging Function
12. Quoting a currency
• Direct quote (USD/INR)
Rs. 73.39/$
• Indirect quote (INR/USD)
1/73.39 = $0.014/Rs
14. Forex Market Intermediaries
• Commercial Banks
• Investment Banks
• Foreign exchange brokers
• Governments and Central Banks
• Consumers and Travellers
• Businesses
• Investors and Speculators
15. Purpose of the intermediaries
• Payment settlements
• Hedging
• Speculation
• Intermediation
• Intervention
• Arbitration
For example £1 = Rs.95.08, $1 = 73.61, £1 =
$1.29
16. American Depository Receipts(ADRs)
• A negotiable certificate issued by a U.S. bank
representing a specified number of share in a
foreign stock that is traded on a U.S.
exchange.
• ADRs are listed on the NYSE, AMEX or
NASDAQ as well as OTC
17. Features
• Denominated in US Dollars
• Dividend also payable in US Dollars
• Listed on American stock exchange
• A single ADR can represent more than one
share in a foreign company
• Holder of ADR can get it converted into shares
• Have no right to vote in a company
22. Global Depository Receipts(GDRs)
• global equivalent of the original American
depositary receipts (ADR)
• Negotiable instrument which is denominated in
some freely convertible currency
• enable a company, the issuer, to access investors
in capital markets outside of its home country
• it may be converted into number of shares
• it is listed and traded in the stock exchange
• Unsecured securities
23. • The domestic company enters into an agreement
with the overseas depository bank for the purpose of
issue of GDR.
• The overseas depository bank then enters into a
custodian agreement with the domestic custodian of
such company.
• The domestic custodian holds the equity shares of
the company.
• On the instruction of domestic custodian, the
overseas depository bank issues shares to foreign
investors.
• The whole process is carried out under strict
guidelines.
24.
25.
26. Indian Depository Receipts(IDRs)
• Standard Chartered Bank created history in
the Indian Capital Market by becoming the
first foreign company to come up with an IDR
issue.
• Terminated on June 15,2020
27. Foreign Exchange Rate
• According to P G Apte, “An exchange rate is
the relative price of one currency in terms of
another”.
28. Types of Foreign Exchange rates
• Spot Rate
• Forward Rate
• Fixed Exchange Rate
• Floating Exchange Rate
• Direct exchange rate
• Indirect exchange rate
• Buying and selling rate(Bid and Ask)
29. Factors affecting foreign exchange rate
• Monetary Policy
• Political Situation
• Balance of Payments
• Interest Rates
• Market Sentiments
• Speculation
• Inflation
• Government Debt
• Economic growth/recession
• Terms of trade
31. Purchasing Power Parity(PPP) Theory
• Absolute PPP
Suppose 10 units of commodity X, 12 units of
commodity Y and 15 units of commodity Z can
be bought through spending Rs. 1500 and the
same quantities of X, Y and Z commodities can
be bought in the United States at an outlay of
25 dollars. It signifies that the purchasing
power of 25 dollars is equivalent to that of Rs.
1500 in their respective countries.
34. Relative PPP
In the above expression, R1 is the rate of exchange
in the current period and R0 is the rate of exchange
in the base period or the original rate of exchange.
PB1 and PB0 are the price indices in country B in the
current and base periods respectively. PA1 and
PA0 are the price indices in the current and base
periods respectively in the country A.
35. It shows that rupee has depreciated while dollar has
appreciated between the two periods.
If the price level in India (B) has risen between the two
periods at a relatively lesser rate than in the U.S.A., the
exchange rate of rupee with dollar will appreciate. The
dollar on the opposite will show some depreciation.
36. Thus rupee has appreciated while the dollar has
depreciated between the two time periods.
37.
38. Assumptions
• There are no transportation costs
• There are no trade barriers
• Perfect information
• Goods and services are perfectly
interchangeable
39. Criticisms
• Transportation costs
• Trade restriction
• Perfect information
• Effect of nontraded costs
• It ignores many real determinants
• The theory overlooks the influence of demand
and supply factors in foreign exchange
40. • The theory holds good in the long run
• The theory involves a practical difficulty of
measuring the true purchasing power of a
currency
• The theory neglects capital transactions in
international economic relations
• The theory applies to a stationary world
41. Balance of Payments Theory
• A deficit in the balance of payments of a country
signifies a situation in which the demand for
foreign exchange (currency) exceeds the supply of
it at a given rate of exchange.
• The demand pressure results in an appreciation
in the exchange value of foreign currency. As a
consequence, the exchange rate of home
currency to the foreign currency undergoes
depreciation.
42. • A balance of payments surplus signifies an
excess of the supply of foreign currency over
the demand for it. In such a situation, there is
a depreciation of foreign currency but an
appreciation of the currency of the home
country.
• The equilibrium rate of exchange is
determined, when there is neither a BOP
deficit nor a surplus. In other words, the
equilibrium rate of exchange corresponds with
the BOP equilibrium of a country.
43.
44. Criticism
• It assumes perfect competition and non-intervention
of the government in the foreign exchange market.
• The theory does not explain what determines the
internal value of a currency
• It unrealistically assumes the balance of payments to
be at a fixed quantity.
• According to the theory, there is no causal connection
between the rate of exchange and the internal price
level.
• The theory is indeterminate at a time. It states that the
balance of payments determine the rate of exchange.
However, the balance of payments itself is a function of
the rate of exchange. Thus, there is a tautology, so
what determines what, is not clear
45. Monetary Approach
• the demand for money depends upon the
level of real income, the general price level
and the rate of interest.
• The demand for money is the direct function
of the real income and the level of prices.
• On the other hand, it is an inverse function of
the rate of interest.
• this approach depends upon the PPP theory
46. • For instance, if the Reserve Bank of India
increases the supply of money by 20 percent,
it may cause a 20 percent rise in price level
and 20 percent depreciation of rupee relative
to, say dollar, over the long period. The rate of
interest, given the demand for money, is
however likely to fall.
47. • Md1 = MS1
• Md2 = MS2
• The subscripts 1 and 2 denote the two countries.
• MS1 = K1P1Y1
• Md2 = K2P2Y2
• Here K1 and K2 are the desired rates of nominal
money balances to nominal national income in two
countries. P1 and P2 are the price levels in two
countries and Y1 and Y2 are the real national
incomes or outputs in the two countries.
48. If K2 and Y2 in the U.S.A. and K1 and Y1 in India remain
unchanged, R will remain unchanged so long as MS1 and
Ms2 remain constant. The changes in R is directly
proportional to change in MS1and inversely proportional to
changes in MS2.
49. • Start with the domestic central bank suddenly increase
the money supply by a substantial amount, with all
other domestic and foreign variables kept unchanged.
The quantity theory of money implies that the rise of
money supply without increase in real output will
drives up the domestic price level, which means
inflation also. The increase in domestic price level will
induce domestic people to buy more foreign products
and cause the exchange rate to depreciate. This is the
same equilibrating mechanism described in PPP.
• If the foreign central bank increase money supply, the
foreign currency would depreciate as by our previous
analysis. Then, in turn, the domestic currency would
appreciate relatively.
50. Portfolio Balance Approach
• the domestic and foreign financial assets such as
bonds to be imperfect substitutes.
• the exchange rate is determined in the process of
equilibrating or balancing the demand for and
supply of financial assets out of which money is
only one form of asset.
• Assumes perfect capital mobility without capital
controls and similar barriers to investment
• home country wealth W = M + B + SF
where M - domestic money, B - domestic bonds
SF - value of foreign bonds F
51. • To start with, this approach postulates that an increase
in the supply of money by the home country causes an
immediate fall in the rate of interest. It leads to a shift
in the asset portfolio from domestic bonds to home
currency and foreign bonds. The substitution of foreign
bonds for domestic bonds results in an immediate
depreciation of home currency. This depreciation, over
time, causes an expansion in exports and reduction in
imports.
• It leads to the appearance of a trade surplus and
consequent appreciation of home currency, which
offsets part of the original depreciation. Thus the
portfolio balance approach explains also exchange
over-shooting. This explanation, in contrast to the
monetary approach, brings in trade explicitly into the
adjustment process in the long run.
52. Criticisms
• It ignores real income as a determinant
• Does not deal with trade flows
• Assigns no role to expectations
• Does not integrate financial and commodity
markets in the short run and long run
53. Interest Rate Parity
• the differential between the interest rates of two
countries remains equal to the differential calculated
by using the forward exchange rate and the spot
exchange rate techniques
• According to this theory, there will be no arbitrage in
interest rate differentials between two different
currencies and the differential will be reflected in the
discount or premium for the forward exchange rate on
the foreign exchange.
• The theory also stresses on the fact that the size of the
forward premium or discount on a foreign currency is
equal to the difference between the spot and forward
interest rates of the countries in comparison.
54. Assumptions
• The purchasing power parity (PPP) does not hold
• The exchange rate is expected unchanged
• Only three (3) assets are available for investment
for each household: money, domestic bonds, and
foreign bonds
• Bonds are not perfect substitutes
• Assumes perfect capital mobility without capital
controls and similar barriers to investment
55.
56. • Covered Interest Rate Parity (CIRP) According
to Covered Interest Rate theory, the exchange
rate forward premiums (discounts) nullify the
interest rate differentials between two
sovereigns. In other words, covered interest
rate theory says that the difference between
interest rates in two countries is nullified by
the spot/forward currency premiums so that
the investors could not earn an arbitrage
profit.
57. • Uncovered Interest Rate Parity (UIP)
Uncovered Interest Rate theory says that the
expected appreciation (or depreciation) of a
particular currency is nullified by lower (or
higher) interest. This method is known as
uncovered, as the risk of exchange rate
fluctuation is imminent in such transactions.
58. • The current spot rate is Rs. 43/USD. The
nominal interest rates in India and the USA are
11.67% and 5% respectively; the one-year
Rs/$ forward rate is Rs. 45.2500/$. An investor
with a one- year holding period can borrow
Rs. 43,000, or $ 1,000. Is covered interest
arbitrage possible?
59. The investor would act as follows:
• Borrow $1,000 for 1 year at 5% p.a. Amount repayable
= $1,000 (1.05) = $1,050
• Convert dollars borrowed at spot rate into rupees =
$1,000 x Rs. 43 = Rs. 43,000
• Invest in rupee-denominated securities for one year.
Amount receivable = Rs. 43,000(1.1167) = Rs.
48,018.10
• Sell rupee proceeds receivable forward at FX/Y. He will
receive – Rs. 48,018.10 ÷ Rs. 45-2500 = $1,061.17
At the end of the year:
• Receive rupee investment plus interest, Rs. 48,018.10
• Honour the forward contract. Give Rs. 48,018.10 and
get $1,061.17
• Repay the dollar loan plus interest ($1,050). The profit
= $1,061.17 – $1,050 = $11.70.
61. Definition
• According to Sloman and John “Balance of
Payment is an accounting record of all
monetary transactions between a country and
the rest of the world”
62. A country has to deal with other
countries in respect of the following
• Visible items
which include all types of physical goods
exported and imported.
• Invisible items
which include all those services whose export
and import are not visible. e.g. transport services,
medical services etc.
• Capital transfers
which are concerned with capital receipts and
capital payment.
63. Features
• It is a systematic record of all economic
transactions between one country and the rest of
the world.
• It includes all transactions, visible as well as
invisible.
• It relates to a period of time. Generally, it is an
annual statement.
• It adopts a double-entry book-keeping system. It
has two sides: credit side and debit side. Receipts
are recorded on the credit side and payments on
the debit side.
64. Balance of Trade
• The difference between a country's imports
and its exports. Balance of trade is the largest
component of a country's balance of
payments.
• When exports are greater than imports than
the BOT is favourable and if imports are
greater than exports then it is unfavourable
65.
66. Importance of Balance Of Payments
• BOP records all the transactions that create
demand for and supply of a currency.
• Judge economic and financial status of a country
in the short-term
• BOP may confirm trend in economy’s
international trade and exchange rate of the
currency. This may also indicate change or
reversal in the trend.
• This may indicate policy shift of the monetary
authority (RBI) of the country.
67. The General Rule in BOP Accounting
• If a transaction earns foreign currency for the
nation, it is a credit and is recorded as a plus
item.
• If a transaction involves spending of foreign
currency it is a debit and is recorded as a negative
item.
• Debit items include imports, foreign aid, domestic
spending abroad and domestic investments
abroad.
• Credit items include exports, foreign spending in
the domestic economy and foreign investments
in the domestic economy.
68. The various components of a BOP
statement
• Current Account
• Capital Account
• Reserve Account
• Errors & Omissions
69. Current Account
• Merchandise exports & imports
Exports = credit entry ( i.e. claims on
foreigners)
Imports = debit entry (i.e.claims on home
country)
• Invisibles include:
non factor services exports and imports:
travel, transportation, insurance,
communication, construction, financial,
software, news agency, royalties,
management and business services
70. Interest, Profits and Dividends
If received = credit entry
If paid = debit entry
Unilateral Transfer Account
One-sided transactions
Include private remittances, gifts, govt grants,
pension payments, disaster relief, etc.
If received = credit;
If paid = debit
71. Capital Account
• Foreign Investments
Foreign Direct Investments
Foreign Portfolio Investments
• Short term borrowings
• Medium and Long term borrowings
72. Errors & Omissions
• The entries under this head relate mainly to
leads and lags in reporting of transactions
• It is of a balancing entry and is needed to
offset the overstated or understated
components.
73. Official reserves Account
• Official reserves represent the holdings by the
Government (or official agencies) of the means of
payment that are generally accepted for the
settlement of international claims.
• The changes in Official Reserves are necessary to
account for the deficit or surplus in the balance of
payments
• It includes SDRs, gold, Foreign exchange reserve
and borrowings from IMF
• If deficit = credit entry
If Surplus = Debit entry
74.
75.
76. • Balance of Payment is at equilibrium when
Receipts are equal to the payments
• Types of Equilibrium in BOP
Static Equilibrium
Dynamic Equilibrium
• Balance of Payment is at Disequilibrium when
Receipts are not equal to the payments
• Deficit(Reciepts<Payments)
Surplus(Reciepts>Payments)
78. Structural Disequilibrium
• Two types namely, Structural Disequilibrium at
Goods level and Structural Disequilibrium at
Factors level
• Structural disequilibrium at the goods level
occurs when a change in demand or supply of
exports or imports alters a previously existing
equilibrium or when a change occurs in the basic
circumstances under which income is earned or
spent abroad, in both cases without the requisite
parallel changes elsewhere in the economy.
79. • Structural disequilibrium at the factor level
results from factors which fail to reflect
accurately factor endowments i.e., when
factor prices, out of line with factor
endowments, distort the structure of
production from the allocation of resources
which appropriate factor prices would have
indicated.
80. Some of the important causes of structural
disequilibrium are as follows :-
• If the foreign demand for a country's products
decline due to the discovery of cheaper
substitutes abroad, then the country's export
will decline causing a deficit.
• If the supply position of a country is affected
due factors like crop failure, shortage of raw-
materials, strikes, political instability, etc, then
there would be the deficit in the balance of
payments.
81. • Changes in the rate of international capital
movements may also cause structural
disequilibrium.
• A war also results in structural changes which
may affect not only goods but also factor of
production causing a disequilibrium in balance
of payments.
• A shift in demand due to the changes in
tastes, fashions, income, etc, would increase
or decrease the demand for imported goods
causing a disequilibrium in the balance of
payments.
82. Cyclical Disequilibrium
• Occurs because of two reasons
• Trade Cycles follow different paths and
patterns in different countries
• Income and Price elasticity of demand for
imports differs in different countries
83. • It is possible that different phases of trade cycles
like depression, prosperity, boom, recession, etc,
may disturb terms of trade and cause
disequilibrium in balance of payments.
• For instance, during boom period, imports may
increase considerably due to increase in demand
for imported goods. During recession and
depression, imports may be reduced due to fall in
demand on account of reduced income.
• During boom period, a country may face deficit in
its BoP position on account increase in imports.
However, during recession its export may
increase, and as such BoP position may show
surplus.
84. • When prices rise in prosperity, a country with
more elastic demand for imports will
experience a decline in the value of imports,
thus leading to a surplus in the balance of
payments. Conversely, as prices decline in
depression, more elastic demand will increase
imports and cause a deficit in the balance of
payments.
85. Short run Disequilibrium
• Disequilibrium caused on a temporary basis
for a short period, say one year is called short
run disequilibrium
• does not pose a serious threat
• caused due to international borrowing and
lending
• Arises due to contingencies like failure of
rains, favourable monsoons, strikes, industrial
peace or unrest
86. Long run or Secular Disequilibrium
• The IMF terms such disequilibrium as
"Fundamental Disequilibrium“
• refers to a persistent deficit or a surplus in the
balance of payments also known as secular
disequilibrium
• Permanent changes in the conditions of
demand and supply of exports and imports
cause fundamental disequilibrium
87. • A developing country in its initial stages may
import large amount of capital & hence its
imports would exceeds exports.
• Deep rooted dynamic changes like capital
formation, innovations, technological
advancements, growth of population etc. also
contribute to fundamental disequilibrium
• When there is a continuous increase in the stock
of gold and foreign exchange reserves there is a
persistent surplus & vise-versa
• When there is a series of short-run disequilibrium
in a country's balance of payments, ultimately it
would lead to fundamental disequilibrium
88. Monetary Disequilibrium
• takes place on account of inflation or deflation
• Due to inflation, the prices of the products in
the domestic market rises, and therefore,
export items will become expensive
• Inflation also results in to increase in money
income with the people, which in turn may
increase demand for imported goods
• As a result imports increases in comparison to
exports
89. • Due to deflation, the prices of the products in
the domestic market falls, and therefore,
export items will become cheap and less
expensive
• Deflation also results in decrease in money
income with the people, which in turn may
decrease demand for imported goods
• As a result exports increases in comparison to
imports
90. Causes of Disequilibrium in BOP
• Import related causes
Population growth
Development programs
Imports of Essential Items
Reduction of import duties
Inflation
Demonstration effect
91. • Export Related Causes
Increase in population
Inflation
Appreciation of currency
Discovery of substitutes
Technological developments
Protectionist trade policy
92. • Other Causes
Flight of Capital
Globalization
Cyclical Transmission
Structural adjustments
Political factors
93. Measures to correct Disequilibrium
• Monetary measures
Monetary policy
o Inflation:- Control money supply by
increase in CRR, SLR, Bank rate etc
o Deflation:- Increase money supply by
increase in CRR, SLR, Bank rate etc
Fiscal policy
o Inflation:- Easy policy like reduced
corporate taxes
o Deflation:- Restrictive policy like
additional taxes