Balance of Payments.ppt

Balance of PaymentsSmita

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What is Balance of Payments?The Balance of Payments is an accounting record of all economic transactions between residents of a country and residents of rest of the world. All transfers whether requited or unrequited find place in the Balance of Payments.

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Parts of Balance of PaymentsCurrent Account

Capital Account and

Reserve Account

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Current AccountMerchandise Visible item of BOP.Invisibles

Services Travel, Transportation, Insurance, Government n.i.e., Miscellaneous.Investment Income.Compensation to Employees.Transfer Payments.

Capital AccountForeign InvestmentLoans

External AssistanceCommercial Borrowings (MT & LT)Short term borrowingsBanking

Reserve AccountIMF Account

Reserves and Gold Account

BOP StatementBOP 2009 (1).pdfBOP 2010-11.pdfBOP Q4 2011.pdfBOP 2013.pdf

Accounting Rules for Balance of PaymentsBOP is a double entry book keeping system and is subject to all rules of book keeping systems.

The Accounting rule is

All transactions which lead to immediate or prospective payments from rest of the world to the country should be recorded as credit entries. The payment themselves actual or prospective must appear as debit entries.

A transaction which results in an increase in demand for foreign exchange in the country for payments to the rest of world should be recorded as debit entry and the actual or prospective payment should be given a credit entry.

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Importance of Balance of Payments statisticsDeficit in the Current account indicates deficit in the trade of goods of services which in other words means excessive imports in comparison to the exports. Such a scenario leads to increase in demand for the foreign currency resulting in its appreciation of foreign currency and depreciation of the domestic currency. On the other hand surplus results in vice versa.

A deficit in the Capital account means outflow of foreign financial assets from the country indicating less faith in the Capital / Debt / Goods markets of the country in terms of return on investment. Such a scenario results in appreciation of foreign currency and depreciation of the domestic currency. On the other hand a surplus in the Capital account results in vice versa.

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BOP crisis of 1990-91 and its impactFor the first time in the economic history of India, India had negative balance both in the balance of trade account and in the invisible account.

This resulted in outflow of investment income and huge current account deficit.

On account of crisis of 1990-91 India borrowed from IMF and on its advise adopted economic reforms which included following Changes in the Industrial policy, Exchange Rate Policy, Investment Policy etc.

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Current Account BalanceSource RBI (In Crores)

YearTrade DeficitInvisiblesTotalFirst Plan-542+500-421979-80-3,374+3140-2341990-91-16,934-433-17,3672004 - 05-1,64,542+1,39,756-24,7862007-08-12, 66, 09613, 29, 575-63, 4792010-11 (p)20, 420 billion22, 521 billion-2, 101 billion

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BOP TrendsReserve Bank of India BOP acc.htm

How to Correct imbalance in BOP?Devaluation of domestic currency.Depreciation of Domestic currency.Export Promotion / Import Substitution.Import tariffsExchange Control.Economic Growth.

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Trends in Import of GoodsPetroleum, Oil and Lubricants (POL) are the main constituents of Indian imports. Their value is roughly 30 - 40% of the value of total Indian imports of goods.During the last decade the imports of POL products has grown by per annum average rate of 17.8% while non POL imports has grown by 14.2%.Other important import items are Edible oils, Capital goods, Pearls and Precious stones.

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Average Annual Import of Goods(In Crores)

Item1951-6181-8591-992001-05Food grains1413746242,170Capital Goods1912,51514,97621,430Mineral Oils775,26427,46988,650Metals931,4487,0039,825Chemicals446601,9214,977Fertilizers-6984,7073,707Pearls and other Precious stones-7309,99326,690Source- RBI

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Import Trends Reserve Bank of India imports.htm

Pattern of export of goods(In Percentage)

Item1970-711980-812004-05Agriculture and Allied products31.730.610.1Ores and Minerals10.76.25.3Manufactured Goods50.355.873.4Mineral Fuels including coal0.80.48.6Others6.56.92.6Source- RBI

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Export TrendsReserve Bank of India exports.htm

Foreign Exchange ReservesForex Reserves 2010.pdfForex Reserves 2012 begining.pdfForeign Exchange Reserve 2013.pdf

Indian Growth Drivers

In India Information technology is becoming the key growth driver. Today India is Services economy and the chief contributors to the growth in services sector are IT companies /ITES /BPOs/ KPOs etc.

In addition to the above in the manufacturing sector there are some technology based industries which are today significantly contributing to Indian growth dream for example - Machine Tools Industry, Forging Industry, Pumps and Valves Industry, Pharmaceutical Industry etc.

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Reforms In Foreign Exchange MarketJuly 1991 Rupee devalued.1992 Introduction of LERMS.1993 - Unified Forex market with market determined forex rates.1997 Tarapore committee recommendations made public.1999-2000 - FEMA enacted to replace FERA.2005 - Lahiri committee submits report.2006 Tarapore Committee II submits report.

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FDI Normspn7_2008 FDI.pdfpn1_2014.pdfpn2_2014.pdfpn6_2013.pdfpn7_2008 FDI.pdf

Issues against and in favour of CACCapital controls have helped India in

Preserving independent Monetary policy.Containing pressure on Exchange rate.Protecting Monetary and Financial stability.

CAC will help in

Availability of larger capital stock to supplement domestic capital stock.Reduction in cost of capital.Gains from international investments to the residents and companies.Alignment with global economy.

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Pre conditions for CAC (As Stated by Tarapore com. I)GFD to GDP ratio to be 3.5%.Inflation Rate around 3-5%.Gross NPA of banks to come down to 5%.CRR to be brought down from 9% to 3%.Sinking fund to meet government debt obligations.Exchange rate to be monitored around +/- %5 of REER.

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Tarapore Committee IRoad Map to Convertibility- Phase I (97-98), Phase II (98-99), Phase III (99-2000).Indian companies should be permitted to invest abroad up to $ 50 million per annum.Corporate should be allowed to freely open their branch offices abroad.No ceiling on ECB on loans having maturity more than 10 years.Restriction on end use of ECB should be scrapped.Exporters/ Exchange earners be allowed 100% retention of forex earning in EEFC account.Direct and portfolio investment should be open to all residents on par with NRIs and FIIs.

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Tarapore I.Banks should be allowed to borrow from abroad. Borrowings can be up to 50% of their Tier I capital in Phase I and limit can be increased up to 75% in Phase II and 100% in Phase III.SEBI registered MF should be allowed to invest abroad subject to overall limit of $ 500 million in Phase I, $1 billion in Phase II, $ 2 billion in Phase III.Individuals may be allowed to invest abroad in foreign financial markets up to $ 25,000 in Phase I, $ 50,000 in Phase II and up to $ I,00,000 in Phase III.Residents be allowed to borrow loans from non residents $2,50,000 with no restrictions on use of funds.Currency Futures should be introduced in India with screen based trading and efficient settlement system.

Tarapore Committee IIRoad map for fuller capital account convertibility in three Phases (2006-07) Phase I, (2007-09) Phase II, (2009-11) Phase III.Lifting restrictions on the end use of ECBs.No ceilings on ECB for period more than 10 years in Phase I. No ceilings on ECB for period more than 7 years in the Phase II.Raising automatic approval limit for the external commercial borrowings up to $ 1 billion from current $ 500 million..Corporate Investments abroad should be permitted up to 250% of their net worth in Phase I, Up to 300% in Phase II, up to 400% in Phase III.

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Tarapore II.Banks should be allowed to borrow up to 50% of their net worth in Phase I, Up to 75% in the Phase II, Up to 100% in the Phase III.Raising individual investment limits up to $50,000 in Phase I, Up to $ I,00,000 in Phase II, $ 2,00,000 in Phase III.Ban Investments through participatory notes and allowing residents to invest in Indian market directly through SEBI registered MF and portfolio management schemesRaising MF investment limits up to $ 3 billion in Phase I, $ 4 billion in Phase II, up to $ 5 billion in Phase III etc.

Forex Rates and impact of Macro economic variables on them

Inflation Rate

Interest Rate

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Terms used in Forex MarketInter bank rates.TT Buying and Selling rates.Bill Buying and Selling rates.TC Buying and TC selling ratesCurrency Buying and Selling rates.

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