(Economic Survey Ch6) Balance of Payments, Forex Reserves, Currency Exchange, NEER, REER - Mrunal

5/6/2014 [Economic SurveyCh6] Balance of Payments, ForexReserves, CurrencyExchange, NEER, REER - Mrunal
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[Economic Survey Ch6] Balance of Payments, Forex
Reserves, Currency Exchange, NEER, REER
1. What is Balance of Payment?
2. Why BoP = 0 in theory?
3. Convertibility
4. Rupee-Dollar Exchange rate
5. Building up Foreign Exchange Reserves
6. FOREIGN EXCHANGE RESERVES
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7. FOREX Reserve: India vs other
8. Why volatility in rupee?
9. How did rupee recover?
10. Exchange Rate of Other Emerging
Economies
11. NEER and REER
12. Why is REER important?
13. External Debt
14. FDI Restrictiveness Index (FRI)
15. FDI: defense offset
16. CHALLENGES AND OUTLOOK
17. Mock Question
What is Balance of Payment?
If you want to see a companys incoming and outgoing cash, youve to check its account
book.
Similarly Balance of Payment (BoP) is the summary / account sheet that shows the cash
flow between India and rest of the world.
BoP is made up of two parts: Current account and capital account. (As per IMF definition,
three parts: Current Account + Capital account+ financial account).
Without getting into technical details, just a brief over view:
Balance of Payment
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Current Account
Capital (and financial)
Account
1. Import, Export (always negative, because we export less
and import more oil n gold, hence weve trade deficit.)
2. Income from abroad (interest, dividends paid on Indian
investors FDI, FII in USA etc.)
3. Transfer (gift, remittances from NRI to their families etc.
always positive for India because of large Diaspora
abroad.)
1. Foreign investment in India (FDI, FII,
ADR, direct purchase of land,
assets).
2. External commercial borrowing,
external assistance etc.
Note: current account can be calculated using Visible and invisibles, that was explained
in old article on current account deficit click me.
Since we want to track the flow of cash, so, whenever American invest in India (via FDI,
FII, ADR etc) we add it as (+), and
when Indians invest in USA (via FDI, FII, IDR etc.) we add it as (-) and then get the final
figure for Foreign investment.
Same goes for everything in balance of payment (remittances, External commercial
borrowing whatever.)
In short, BoP= we are tracking the incoming and outgoing money.
For India, current account has been in deficit (negative number) and capital account has
been in surplus (positive number).
The BoP accounting system is similar to double entry book-keeping.
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Therefore theoretically, balance in current account and balance in capital account should
be same (ignoring the +/- signs).
In other words, if there is deficit in current account, there has to be equal surplus in capital
account. Why?
Why BoP = 0 in theory?
Assume there are only two countries India (rupees) and USA (dollars). And there are no
forex agents or middlemen, taxation, regulation, cricketers, politicians, saah-bahu serials
nothing
Now Indian importer buys Apple6 phones worth 10 billion US$ from American exporter.
Since there is no forex agent, the Indian importer will pay 500 billion Indian rupees to that
American exporter. (assuming 1$=50 Rs.) Means that much Rupee currency is gone
from Indian system via current account.
But that American exporter has no use of Indian rupees! He lives in USA, he cannot even
buy a burger from local McDonalds shop using Indian rupees. So what can he do?
1. He can import something else from India (e.g. raw material, steel and plastic for further
production of Apple6) = our rupee currency comes back to India via current account.
2. He can invest that Indian currency to setup some factory or joint venture in India
(=our rupee currency comes back to India via capital account)
3. He can buy some shares or bonds in India. Again our rupee currency comes back.
4. He can find a 2
nd
American who wants to import something from India / wants to invest
in India. Apple6 guy can sell his rupee currency to that third American fellow
@Rs.50=1$ or Rs.49=1$ or Rs.99=1$ (depending on the desperation of that 2
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American fellow).
In short, if rupee goes out, it has to come back. (same for dollar, from American point of
view).
Therefore, current account + capital account = ZERO (balance of Payment), atleast in
theory.
But in reality, RBI or tax authorities never have complete details of all financial transactions
and currency exchange rates keep fluctuating. Hence there will be statistical
discrepancies, errors and omissions and. So, BoP is expressed as:
Current Account + Capital account + Net errors and omissions = 0 (Balance of Payment).
In IMF definition, we can express this as
Current Account + Capital account + Financial account + balancing item = 0
Ok then does it mean a country can never have surplus (or deficit) in Balance of payment?
Well, a country can have TEMPORARY surplus or deficit in BoP. Because, BoP is
calculated on quarterly and yearly basis. There is a good chance, that American Apple6
exporter may not invest back all those 500 billion Indian rupees in India within that time-
frame.
Secondly, Indian Government may put some FDI/FII restrictions so Apple6 exporter (or that
third American guy) cannot re-invest in India even if he wants to.
But in the long run, system will balance itself. for example
Apple exporter will find some fourth American importer and convince him to pay Indian
exporter in rupee currency and thus apple guy will get rid of his 500 billion Rupees by
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exchanging it with that American importers dollar
Or the apple exporter will find some NRI living in USA. This NRI wants to send money
(dollar earned by working in USA) to his family back in India, (preferably in Indian
currency ) so this NRI will be willing to exchange his dollar savings with that Apple
exporters rupees.
There are many other possibilities and combinations but the point is, in BoP,
whatever currency goes out of the country, will come back to the country.
Convertibility
Suppose you want to import a dell computer from USA. And American exporter accepts
only payments dollars.
If you can easily convert your rupee into dollars, that means Rupee is fully convertible. And
rupee is fully convertible as far as Current account transactions are concerned (e.g.
import, export, interest, dividends).
But rupee is partially convertible for capital account transection. (In crude terms it means, if
an Indian wants to buy assets abroad or invest via FDI/FII OR borrow via External
commericial borrowing (ECB) he cannot do it beyond the limits prescribed by RBI. (And
vice versa e.g. American wants to convert his dollars to rupees to invest in India, then also
RBIs limits have to be followed).
RBI gets power to do ^this, via FERA and FEMA Acts.
1973: Foreign Exchange Regulations Act, 1973 (FERA).
1997: Tarapore Committee (of RBI), had recommended that India should have full capital
account convertibility. (Meaning anyone should be allowed to freely move from local
currency into foreign currency and back, without any restrictions by Government or RBI.)
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2002: Government replaced FERA with Foreign Exchange Management Act (FEMA).
Although full capital account convertibility is yet not given.
Full capital account convertibility has both pros and cons. But thatd require another
article. Lets get back to the topic, we are seeing the 6
th
chapter of Economic Survey:
Balance of Payment, exchange rates etc.
Rupee-Dollar Exchange rate
How does Fixed Exchange Rate system work? and how does market based exchange
rate system work? = explained in the Bretton woods article. Click me
Anyways, lets construct a bogus technically incorrect model to understand the market
based exchange rate system, once again:
Assume following things
There are only two countries in the world India and America.
India has rupee currency. Indian farmers dont grow Onions.
America doesnt have any currency, they trade using onions. The rate being 1kg
onion=Rs.50
First situation: American investor thinks that Indian economy is rising. If we invest in India
(FDI/FII), well make good profit. So theyre more eager to convert their onions to Indian
rupee currency. So theyd even agree to sell 1kg onions =Rs.45. (and then buy Indian
shares/bonds worth Rs.45)
Result =Rupee strengthened against onion (dollar).
During this time, RBI governor also buys 300 billion kilo onions from the forex and stores
these onions in his refrigerator. (Why? Because onions are selling cheap! And why onions
are selling cheap? Because there is surge in capital investment in India by American
investors.)
Ok everything is going nice and smooth. Now add third country to our bogus model: UAE.
Second situation: UAE has increased crude oil prices, and they dont accept rupee
currency. They also want payment in onions.
1 barrel of crude oil costs 132kg of Onions.
India is eager/desperate for oil, because if we dont have crude oil, we cant get petrol,
diesel= whole economy will collapse.
So India would agree to buy 1kg onion even for Rs.55 (from American or forex agent or
whoever is willing to sell his onions). Then India can give that onions to some Sheikh of
UAE and import crude oil.
Third situation: The Sheikh of UAE gets even greedier, he demands 200kg onions for 1
barrel of crude oil. Now 1kg onion sells for Rs.59, Because those with onion surplus
(vendors) know that India likes it or not, itll have to buy onions to pay for the crude oil!
Thus, Rupee has weakened against onion (Dollar.)
If such situation continues, then there will be huge inflation in India (because crude oil
expensive=petrol/diesel expensive = transport expensive= milk/vegetables and everything
else transported using petrol/diesel becomes expensive.)
Now RBI governor decides to become the hero and save the fall of rupee against onion.
So, He loads a few tonnes of onions in his truck and drive it to the forex market.
Result: onion supply has increased, price should go down.
Now onions get little cheaper: 1kg onion =53 Rs.
Thus RBIs intervention in the forex market has led to recovery of rupee.
Ok so what do we get from this story?
1. RBIs intervention to buy Foreign exchange during surge in capital investment= leads to
build-up of (foreign exchange) reserves, which provides self-insurance against external
vulnerability of rupee.
2. When RBI sells its foreign exchange reserves, it stems (halts) the fall of rupee.
3. Higher foreign exchange reserve levels restore investor confidence and may lead to an
increase in foreign direct and indirect investment flows= boost in growth and helps bridge
the current account deficit.
Building up Foreign Exchange Reserves
Prior to 1991, India followed License-quota-inspector (and suitcase) raj and import
substitution strategy. (Beautifully explained class 11 NCERT textbook.)
During that era, foreign companies couldnt invest in India.
Imported products such as radio / camera/ wristwatches attracted heavy custom duty. (And
that led to rise of smugglers and mafias, and the Bollywood movies that romanticized their
criminal lives.)
On the other hand, thanks to the license-quota-inspector (and suitcase) raj, the private
Indian companies werent big or efficient enough to compete in international market so
export was also low.
Result: during that time incoming money (via export, investment) was very low. Hence RBI
couldnt build up huge forex reserve. (when onion supply is low, its prices will be high)
Ultimately in 1991, the Forex reverses of India were about to exhaust.
Finally India had to pledge its gold to IMF and get loans.
Then India had to open up its economy for private and foreign sector investment. Remove
the license-quota-inspector raj etc. to boost the incoming flow of dollars and other foreign
currencies..all those LPG reforms. (Although suitcase raj still continues, because the
Mohans in the system are blinded by totally awesome people like A.Raja.)
fast-forward: now weve a trillion dollar economy, our software and automobile companies
are globally recognized blah blah blah.
But the lesson learnt: RBI should have good foreign exchange reserve.
Hence post LPG reforms, RBI has been buying dollars, pound yen etc. from the currency
market, whenever FII/FDI inflow is high. Because during such situation, the foreign
investors are more eager to get their dollars converted to rupee currency hence rupee is
trading at higher rate e.g. 1$=Rs.49
But after global financial crisis, RBI has stopped building forex reserves actively.
Nowadays RBI intervenes in the forex market, only to stop the excess volatility (fluctuation)
in rupee exchange rate.
However, there was a sharp decline in rupee in 2011-12. Then RBI had to sell foreign
exchange worth 20 billion dollars. (so demand of foreign currency would decrease and
rupee would stop).
Similarly in 2012 also RBI had to sell its foreign exchange reserve worth 3 billion dollars to
prevent the fall of rupee. (in June 2012, Rupee had became very weak: 1$=around 57
Rupees. Thanks to RBI and Governments interventions, it came back to the normal 53-54
level at the end of 2012.)
FOREIGN EXCHANGE RESERVES
Indias foreign exchange reserves is made up of
1. Foreign currency assets (FCA) (US dollar, euro, pound sterling, Canadian dollar,
Australian dollar and Japanese yen etc.)
2. gold,
3. special drawing rights (SDRs) of IMF
4. Reserve tranche position (RTP) in the International Monetary Fund (IMF)
The level of forex reserve is expressed in US dollars. Hence Indias forex reserve declines
when US dollar appreciates against major international currencies and vice versa.
RBI gains Foreign exchange reserves by
buying foreign currency (via intervention in the foreign exchange market
Funding from the International Bank for Reconstruction and Development (IBRD), Asian
Development Bank (ADB), International Development Association (IDA) etc.
aid receipts,
interest receipts
FOREX Reserve: India vs other
Country wide- China has the largest forex reserve (3300+ billion USD). India is 8
th
position
(close to 300 Billion USD).
Countries with largest Forex reserves
1. China
2. Japan
3. Russia
4. Switzerland
5. Brazil
6. South Korea
7. Hong Kong
8. India
Why volatility in rupee?
Volatility = Variation in something over the given time.
if today SENSEX is 12000 points, tomorrow it goes up by 200 points and day after it goes
down by 300 points etc..they we say market is volatile.
If morning shifts SSC paper is too easy but evening shifts SSC paper is too damn difficult
then we can say SSC paper is volatile.
Similarly, if there is too much fluctuation in Dollar to rupee exchange rate, we say rupee is
volatile.
In 2012, the rupee has experienced unusually high volatility. Why?
#1: import-export
Demand for Indian goods and services has declined due to Euro-zone crisis + America
hasnt fully recovered.
On the other hand, cost of import= very high due to oil and heavy gold import (due to high
inflation).
Similarly high inflation = raw material / services become costly for the export. If he raises
the prices, then his export product becomes less competitive than Cheap China made
stuff.
#2: FII
In the total foreign investment in India, majority comes from FII (and not from FDI).
FII money is hot, it leaves quickly whenever FII investors feels that Indias market is not
giving good returns and or some other xyz countrys market is giving better returns.
There are week-to-week variation in such FII inflows and outflows. Hence it leads to
changes in rupee-dollar exchange rate.
#3: Dollar is strengthened
US treasury bonds are consider the safest investment. During the peak of Eurozone,
Greece crisis, the big investors started pulling out money from Europe and investing it in
US treasury bonds. = demand of dollar increased. So other currencies would automatically
weaken against dollar.
#4: policy paralysis
For past few years, Indian Government was lazy regarding environmental project
clearances, land acquisition, FDI in retail, pension, insurance etc. that has led to foreign
investors losing faith in Indian economy= slowdown in FII inflows. (besides Government did
not allow more FDI in pension / insurance / retail etc. so FDI inflow did not increase either).
#5: Risk On / Risk off
From the earlier article on debt vs equity, Government bonds = safer than equities
(shares). But when an investment is safe= it doesnt offer good returns.
When foreign investors feel confident, they display risk on behavior =they invest more in
equities, particularly in developing countries. (which are risky but offer more profit).
But when foreign investors are not feeling confident, they display risk off behavior, = they
usually fall back to investing in US treasury bonds or gold.
In India, majority of foreign investment comes from FII (and not FDI)
and FII investors are more prone to displaying this risk-on/risk-off behavior.
They plug in their money quickly, they pull out their money quickly. Thus, Indian rupees
exchange rate becomes volatile against Dollar.
Therefore, Indian Government needs to inspire and sustain the confidence of foreign
investors, to prevent the fall of rupee. RBI intervention in forex market, cannot help beyond
a level.
How did rupee recover?
Rupee is weakening against dollar, it means demand of rupee is less than the demand for
dollars. So how did RBI and Government fix it?
RBI Govt.
During 2012, RBI sold around 3 billion dollars from its forex
reserves.
Oct-12, Rupee recovers, 1$=around 51 rupees.
Govt. allowed FIIs to invest
more money in govt.and
corporate bonds.
Govt. eased the FDI policy for
RBI allowed Indian banks to give more interest on Foreign
Currency Non-Resident (FCNR) bank accounts. (thus attracting
more NRIs to save their dollars in Indian banks).
pension, insurance, aviation,
multi-brand retail etc.
Govt. offered subsidies and
tax benefits to exporters.
Exchange Rate of Other Emerging Economies
In 2012, Rupee wasnot the only currency that weakened against dollar.
The currencies of other emerging economies, such as Brazilian real, Argentina peso,
Russian rouble, and South Africas rand also depreciated against the US dollar.
It means dollars demand has increased. In the wake of sovereign debt crisis in the euro
zone and due to uncertain global economic environment, more and more investors are
preferring to buy US treasury bonds and other securities in USA.
NEER and REER
We keep reading bad headlines that rupee weakened against dollarrupee all time low
against dollarand so on.
Does it mean, Indian rupee is a really bogus weak and fragile currency? Nope.
Because we dont trade only with USA.
We dont trade only in terms of Rupee to Dollar exchange.
We also trade with many other countries in many other forms of currency.
Therefore, if we want to objectively measure Rupees volatility, weve to compare its price
fluctuations with multiple currencies (Euro, Yen, Pound etc.) and not just against single
Dollar currency.
Secondly: 1$=Rs.50 or 1$=Rs.40 that alone doesnt decide the demand of goods and
services between India and America. This demand also depends on the inflation (both in
India and in USA.)
NEER and REER index (calculated by RBI), help us here get a clear picture here.
First youve to calculate NEER. Then using NEERs, you calculate REER.
NEER REER
Nominal Effective Exchange Rate Real Effective Exchange Rate (REER)
The weighted average of bilateral nominal exchange rates of
the home currency in terms of foreign currencies.
weighted average of nominal
exchange rates, adjusted for
inflation.
Why is REER important?
REER captures inflation differentials between India and its major trading partners.
REER reflects the degree of external competitiveness of Indian products
REER captures movements in cross-currency exchange rates.
RBI calculates two REER indices:
REER-6 REER-36
Here Indian rupee is measured against 6 big currencies viz.
1. Dollar
2. Hong Kong dollar
3. Euro
4. Pound sterling
5. Japanese Yen
6. Chinese Renminbi
As the name suggest, 36 currencies.
Now Indian rupees vs. other currencies (Dec. 2012 data)
Just for reference:
1 unit of foreign currency Worth Rs.
Indonesian Rupiah 0.006
S.Korean Won 0.05
Pakistan Rupee 0.56
Yen 0.65
Thailand Baht 1.78
Mexican Peso 4.25
Chinese Renminbi 8
Brazilian Real 26
Turkish LIRA 30
US Dollar 54
Canadian Dollar 55
Euro 71
SDR of IMF 84
Pound 88
External Debt
World Bank has released International Debt Statistics, 2013
It contains the debt numbers for the year 2011.
According to those statistics, in 2011 India was in fourth position in terms of absolute
external debt stock after China, the Russian Federation and Brazil.
At the end of March 2012, Indias external debt stock = 345 billion (near to 17 lakh crore
rupees.)
Indias external debt is high because of
Higher NRI deposits (since NRIs are not getting much return on their dollar savings in
American banks, they prefer to invest it in India).
External Commercial borrowings (by Indian corporates)
Corporate borrowers in India and other emerging economies are keen to borrow in foreign
currency (dollar and Euro). Because in US/EU right now the market is down, not many
loan domestic taker businessmen, hence their banks/ investors dont mind giving loans to
foreigners (that is Indian / other Asian businessmen) at very low interest rate and longer
EMIs.
But such borrowings however, are not always helpful, especially in times of high currency
volatility. For example, if Indian businessman had borrowed loans from USA when 1$=49
rupees but after some years, if 1$=57 rupee, then hell have to repay more. This will badly
affect not just him but to Indias BoP as well.
FDI Restrictiveness Index (FRI)
Prepared by OECD.
A score of 1 indicates a closed economy and 0 indicates openness.
China is ranked #1 (=it is the most restrictive country)
India is ranked fourth
Foreign Direct Investment (FDI) is preferred to the foreign portfolio investments primarily
because FDI is expected to bring modern technology, managerial practices and is long
term in nature investment.
The Government has liberalized FDI norms overtime. As a result, only a handful of
sensitive sectors now fall in the prohibited zone and FDI is allowed fully or partially in the
rest of the sectors.
FDI: defense offset
At present, 26% FDI is allowed in Indian defense sector. It also requires
FIPB approval
licensing under Industries (Development & Regulation) Act, 1951
has to follow guidelines on FDI in production of arms & ammunition.
India needs to open up the defense production sector to get access and ensure transfer of
technology.
The existing FDI policy for defence sector provides for offsets policy. (meaning the foreign
company has to buy or outsource some of its work to local /domestic players. E.g. FDI in
multibrand retail, mandates that foreign company must buy 30 percent of the from small-
scale industries.)
Such offset policy soften the balance of payments impact and/or develop local technical
capability.
Recently Government revised the offsets policy for defense sector.
But still, it has shown no visible direct or indirect benefits h on the domestic Indian defence
industry.
CHALLENGES AND OUTLOOK
while capital inflows in India, were sufficient to finance the CAD safely.
But majority of the capital flows are via FII (hence volatile)= this has led to financial
fragility and is reflected in rupee exchange rate volatility.
We cannot significantly increase our exports in the short run because they are dependent
upon the recovery and growth of partner countries (US, EU). And this may take time.
Therefore our main focus has to be on curbing imports, mainly by making oil prices more
market determined (=expensive), and curbing imports of gold.
We should put greater emphasis on FDI including opening up sectors further.
Finally, external commercial borrowing needs to be monitored carefully.
Misc. facts
Three top countries from where FDI comes to India: Mauritius, Singapore and UK
Global Economic Prospects= this report is published by world bank.
Mock Question
1. Which of the following, is not a part of Capital account
1. FDI
2. FII
3. Remittances
4. External commercial borrowing
2. Which of the following is not a part of Current account?
1. Import
2. Export
3. External commercial borrowing
4. Interest, dividends paid on FII
3. India has deficit in
1. Current account
2. Capital account
3. Both
4. None
4. India has surplus in
1. Current account
2. Capital account
3. Both
4. None
5. Indias official forex reserve doesnt include
1. Foreign currency assets (FCA) (US dollar, euro, pound sterling, Canadian dollar,
Australian dollar and Japanese yen etc.)
2. Gold
3. Silver
4. Special drawing rights (SDRs)
6. How can RBI build its foreign exchange reserve?
1. By Buying foreign currency
2. via funding from World Bank, ADB etc.
3. Both
4. None
7. Which of the following country has second largest forex reserves in the world?
1. India
2. France
3. Japan
4. USA
8. Among the countries with largest forex reserves, India ranks
1. second
2. third
3. fifth
4. eighth
9. Rupee will strengthen against dollar when
1. Government eases FDI policy
2. Government raises the ceiling on FII investment
3. Both
4. None
10. Correct statement
1. NEER is calculated by RBI
2. REER is calculated by Finance ministry
3. both
4. none
11. REER captures
1. difference in inflation between India and its trading partners
2. external competitiveness of Indian products
3. Both
4. none
12. Which of the following currency is not part of REER-6 calculation?
1. Hong Kong Dollar
2. Japanese Yen
3. Pound Sterling
4. Canadian Dollar
13. Incorrect Match
1. S.Korea: won
2. Mexico: Peso
3. Argentina: Peso
Lucent's General Know...
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4. S.Africa: Baht
14. Which of the following is not released by World Bank?
1. International Debt Statistics, 2013
2. FDI Restrictiveness Index
3. Global Economic Prospects
4. All of Above
15. FDI Restrictiveness Index is released by
1. IMF
2. ADB
3. OECD
4. World Bank
16. Majority of FDI to India, comes from
1. Mauritius
2. Germany
3. USA
4. None of above
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Revenue Deficit, Loans, Interest, Dividend classification explained
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Tags: Economic Survey 2012
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[Economy] Current 2014 Feb Week 1: Fiscal Policy, Spectrum, Subsidies, LPG and
Banking Sector (Part 1 of 3)
[Economy] Current 2014 Feb Week 1: FDI, Regulatory Bodies, Infrastructure (Part 2 of 3)
bhai

Reply
Definition of Nominal Effective Exchange Rate NEER
The unadjusted weighted average value of a countrys currency relative to all major currencies being traded
within an index or pool of currencies. The weights are determined by the importance a home country places on
all other currencies traded within the pool, as measured by the balance of trade.
bhai

Reply
Definition of Real Effective Exchange Rate REER
The weighted average of a countrys currency relative to an index or basket of other major currencies adjusted
for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of
one countrys currency, with each other country within the index.
Don

Mrunal, like the way you write, you are like Chetan bhagat full masala, Indian(desi) language explanation.
Reply
Jokes apart, nice article.
DHANA

Reply
A-3,11,12,16
B-4,15
C-1,2,5,6,7,9,15
D- 8,14
Zulu

Reply
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ashif

Reply
During 2012, RBI sold around 3 billion dollars from its forex reserves.
Oct-12, Rupee recovers, 1$=around 51 rupee///how?
Shashank

Reply
RBI sold dollars, thus reducing the demand for dollars, in turn strengthening the rupeethe same
way like bring more onions to the market and its price falls!!
let me know if i m not correct..
Sachin

Reply
RBI sold dollar to whom??how it is done in market?pls xplain
Sailesh

Reply
RBI sells Dollars in FOREX market to decrease demand of Dollars and hence
depreciating Dollar and appreciating Rupee
Shashank

Reply
Mrunal sir, how is it that well developed economies like Japan and S.Korea have their currencies weaker than
the Indian Rupeelike 1 Yen=0.65 and 1 S.Korean Won=0.05??
garima

Reply
mrunal sir,
indian economy by ramesh singh, page 15.6-
there is no deficit or surplus in capital account like the current account
while you say, if there is deficit in current account, there has to be equal surplus in capital account.
plz clarify.
thanks
garima

Reply
also, if anyone can help me with this ques:
if there is deficit in current account, there has to be equal surplus in capital account. Why?
terminator

Reply
@garima: BOP includes current account, capital account, forex reserves and errors and omissions.
so the deficit in current account is filled or made up by surplus in capital account and if there is still more left
after this it goes to forex reserves. and to answer why deficit needs to be equal to surplus in capital account.
deficit is overspending so it has to be financed from somewhere and this somewhere is surplus in capital
account. lets take an example suppose you spent rs 1000 on chocolates while you had only 600 with you then
your overspending is 400 so from somewhere these 400 needs to be financed..ie..by borrowing so it can be
400 or 500 or 600 or anything more than 400.this borrowing is current account and has to be atleast equal to
400. thats why if there is deficit in current account, there has to be equal surplus in capital account.
hope this helps.
garima

Reply
got it thanks..
but why is capital account always a surplus in case of india?
terminator

Reply
@garima: as you know that current account includes the liabilities to the government. it includes external
commercial borrowings, domestic borrowings, fdi, fii, nri deposits and remitances. As indian diaspora is large
and quite rich and also lately fdi and fii have shown interest in the indian economy this capital account
happens to be surplus.
garima

Reply
okk.. thanks
terminator

@garima: 1 correction it should be only nri deposits not deposits and remitances. Sorry.
Reply
terminator

Reply
oops!! sorry read current as capital account.
Shri

Reply
Mrunal sir can we get all the economic survey chapters in single file ? it will be easier to study.. thanx
disa sarma

Reply
There are some interesting US and India related taxation questions and answers in the community section on
http://www.simplyglobal.com. Looks like some of them have been answered by CPAs from US and CAs from
India. I have used their daily exchange rate comparison for different banks/companies. I also like the graph on
their website that shows the trend of the exchange rate over the last year, as published by Reserve Bank of
India.
PRASHANT

Reply
MRUNAL SIR YOU GAVE THE EXAMPLE OF I PHONE FOR BALANCE OF PAYMENT.BUT I DIDNT
UNDERSTAND ONE THING THAT WHY APPLE 6 EXPORTER WILL ACCEPT PAYMENT IN INR INSTEAD OF
DOLLARS??? PLZ RPLY??
Chara

Reply
the story here is an assumption.
abhishek

Older Comments
Reply
effect of balance of payment disequillibrium
rohit

Reply
1 c,2 c,3 a,4 b,5 c,6 b,7 c,8 d,9 b,10 a,11 c,12 d,13 b,14 b,15 c,16 c
chandramohan

Reply
good article
pooja

Reply
sir, i could not find the current account deficit page its not available
Indian87

Reply
Sir,
This link is not opening..
http://mrunal.org/2012/05/economy-current-account-deficit-how-to.html
likewise, there are some other links also. Kindly suggest a solution.
!
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