FUNCTIONS OF CENTRAL BANK

(i) Bank of issue:

Possesses an exclusive right to issue notes (currency) in every country of the world. In the initial years of banking, every bank enjoyed
the right of issuing notes. However, this led to a number of problems, such as notes were over-issued and the currency system became
disorganized. Therefore, the governments of different countries authorized central banks to issue notes. The issue of notes by one bank
has led to uniformity in note circulation and balance in money supply.

(ii) Government’s banker, agent, and advisor:

Implies that a central bank performs different functions for the government. As a banker, the central bank performs banking functions
for the government as commercial banks performs for the public by accepting the government deposits and granting loans to the
government. As an agent, the central bank manages the public debt, undertakes the payment of interest on this debt, and provides all
other services related to the debt.

As an advisor, the central bank gives advice to the government regarding economic policy matters, money market, capital market, and
government loans. Apart from this, the central bank formulates and implements fiscal and monetary policies to regulate the supply of
money in the market and control inflation.

(iii) Custodian of cash reserves of commercial banks:

Implies that the central bank takes care of the cash reserves of commercial banks. Commercial banks are required to keep certain
amount of public deposits as cash reserve, with the central bank, and other part is kept with commercial banks themselves.

The percentage of cash reserves is deeded by the central bank! A certain part of these reserves is kept with the central bank for the
purpose of granting loans to commercial banks Therefore, the central bank is also called banker’s bank.

(iv) Custodian of international currency:

Implies that the central bank maintains a minimum reserve of international currency. The main aim of this reserve is to meet emergency
requirements of foreign exchange and overcome adverse requirements of deficit in balance of payments.

(v) Bank of rediscount:

Serve the cash requirements of individuals and businesses by rediscounting the bills of exchange through commercial banks. This is an
indirect way of lending money to commercial banks by the central bank. Discounting a bill of exchange implies acquiring the bill by
purchasing it for the sum less than its face value.

Rediscounting implies discounting a bill of exchange that was previously discounted. When owners of bill of exchange are in need of
cash they approach the commercial bank to discount these bills. If commercial banks are themselves in need of cash they approach the
central bank to rediscount the bills.

(vi) Lender of last resort:

Refer to the most crucial function of the central bank. The central bank also lends money to commercial banks. Instead of rediscounting
of bills, the central bank provides loans against treasury bills, government securities, and bills of exchange.

(vii) Bank of central clearance, settlement, and transfer:

Implies that the central bank helps in settling mutual indebtness between commercial banks. Depositors of banks give checks and
demand drafts drawn on other banks. In such a case, it is not possible for banks to approach each other for clearance, settlement, or
transfer of deposits.

The central bank makes this process easy by setting a clearing house under it. The clearing house acts as an institution where mutual
indebtness between banks is settled. The representatives of different banks meet in the clearing house to settle inter-bank payments.
This helps the central bank to know the liquidity state of the commercial banks.
(viii) Controller of Credit:

Implies that the central bank has power to regulate the credit creation by commercial banks. The credit creation depends upon the
amount of deposits, cash reserves, and rate of interest given by commercial banks. All these are directly or indirectly controlled by the
central bank. For instance, the central bank can influence the deposits of commercial banks by performing open market operations and
making changes in CRR to control various economic conditions.

(b) Developmental Functions:

Refer to the functions that are related to the promotion of banking system and economic development of the country. These are not
compulsory functions of the central bank.

These are discussed as follows:

(i) Developing specialized financial institutions:

Refer to the primary functions of the central bank for the economic development of a country. The central bank establishes institutions
that serve credit requirements of the agriculture sector and other rural businesses.

Some of these financial institutions include Industrial Development Bank of India (IDBI) and National Bank for Agriculture and Rural
Development (NABARD). These are called specialized institutions as they serve the specific sectors of the economy.

(ii) Influencing money market and capital market:

Implies that central bank helps in controlling the financial markets Money market deals in short term credit and capital market deals in
long term credit. The central bank maintains the country’s economic growth by controlling the activities of these markets.

(iii) Collecting statistical data:

Gathers and analyzes data related to banking, currency, and foreign exchange position of a country. The data is quite helpful for
researchers, policymakers, and economists. For instance, the Reserve Bank of India publishes a magazine called Reserve Bank of India
Bulletin, whose data is useful for formulating different policies and making macro-level decisions.

ROLE OF EXIM BANK

Functions of Exim Bank

The following are the functions of Export Import bank:

1. Finance for exports and Imports: Exim bank helps by providing finance for exports and imports of goods as well as services from India.
One of the major export policies adopted by government of India is the export of value added items. For example, all along we have
been exporting Hades and skins from India. Now, it is ‘processed leather’ in the form of leather goods. So, the exporter who was earning
1 or 2 dollars while exporting Hades and skins will now earn 25 to 30 dollars when he exports in the form of leather goods. Similarly,
import of raw materials such as gold will be financed by Exim bank, since it will be exported as jewels which is again a value added
export.

2. Finance on deferred basis: Exim bank provides finance on deferred basis for importing capital equipment and other machinery.
The cost of capital equipment in foreign countries will be more and the Indian importer cannot afford to pay lump sum payment in
foreign exchange. The Exim bank provides guarantee on behalf on the importer and enables the importer to make payment on
installment basis to the foreign exporter. Or, the bank itself may pay in bulk to the foreign exporter and receive installment payments
from the Indian importer.

3. Lease Finance: It provides lease finance for importing capital equipment. Under cross border leasing, the lessor may be in a foreign
country, while the lessee will be in India. The Exim bank helps the Indian lessee in obtaining the capital equipment on lease by making
the lease payment in terms of foreign exchange. It also helps for import leasing, wherein both the lessor and lessee will be Indians but
the equipment imported on lease may be from U.S. A or U.K.

4. Finance to export projects: Export projects in Third World countries are financed. India has taken up various export projects in Third
World countries, such as railway project in Tanzania. Similarly, projects on some of the oil wells in Kuwait and Iraq taken up by Oil and
Natural Gas Commission (ONGC) are also financed by Exim bank. All the necessary equipment and the manpower required for such
projects will be financed by the Exim bank.

5. Line of credit: The Exim bank provides line of credit to foreign importers so that exports from India can increase. Under line of credit,
exim bank will provide finance to the Central bank of the borrowing country which in turn will provide to the commercial bank and
ultimately the credit will reach the importer. This kind of credit is safe as there is guarantee of funds at every stage.

6. Refinance in foreign exchange: The Exim bank obtains bulk loan in foreign currencies in the foreign exchange market and provides
refinance to the financial institutions, providing export finance. Different types of exporters may require different foreign currencies and
these are obtained by the Exim bank at a competitive interest rate and are given to commercial banks for lending to exporters. It is due
to this, the commercial banks are able to provide pre-shipment and post-shipment finance to different exporters.

7. Contribution to Equity fund: The Exim bank also contributes to the shares, debentures of Indian companies involved in exports.
Export companies while raising capital, may issue shares which may be partly financed by Exim bank. The bank may extend this facility
as a temporary finance as it will not retain the shares permanently. As a part of investment policy or by way of portfolio investment, it
may invest in the shares and debentures of companies involved in exports.

8. Consultancy Services: The Exim bank also provides technical, administrative and other assistance to exporters. Export projects are
analyzed by the Exim bank from the point of view of technical, managerial, marketing and financial feasibility. When it finds a project
viable, on the above grounds, it will not hesitate to fund it.

Forms of Financial Assistance Provided by EXIM Bank to Indian Companies-

Delayed Payment Exports- Term loans are provided to those exporters who deal with exporting of goods and services and
this enables them to offer delayed credit to the foreign buyers. This system of deferred credit covers Indian consultancies,
technology, and other services. Commercial banks take part in this program either directly or under risk syndication
arrangement

Pre-shipment credit-Indian companies which are highly involved in the execution of export activities beyond the cycle time of
six months are funded by EXIM Bank. The construction or turnkey project exporters enjoy the provision of rupee mobilization.

Term loans for export production- EXIM Bank offers term loans to the 100 percent export oriented units, units involved in
free trade zones, and exporters of various softwares in India. EXIM bank also works in association with International Finance
Corporation, Washington, to provide financial assistance to the small scale and medium industrial units in terms of
ameliorating the export production capacity of these units in India. EXIM Bank also provides funded and non- funded facilities
to deemed exports from India.

Foreign Investment Finance- EXIM bank provides financial assistance for equity contribution to the Indian companies who
form Joint Venture with the foreign companies.

Financing export marketing-It helps the exporters carry out their export market development plan in Indian market

Financial Assistance Provided by EXIM Bank to Overseas Companies-

Foreign Buyer's Credit- the foreign players are entitled to a sum of financial assistance in order to import goods and services
on deferred payments.

Lines of Credit- EXIM bank also offers financial assistance to the overseas financial institutions and various government
agencies for import of goods and services from India.

Reloaning Options to Foreign Banks- The foreign banks are entrusted with funding from EXIM bank in order to provide the
same to the their clients across the globe for importing of goods from India
  

 INTRODUCTION OF ECGC

Export Credit Guarantee Corporation of India Ltd. ( ECGC ) is a Government of India Enterprise whichprovides export credit insurance
facilities to exporters and banks in India. It functions under theadministrative control of Ministry of Commerce & Industry, and is
managed by a Board of Directorscomprising representatives of the Government, Reserve Bank of India, banking and insurance and
exportingcommunity. Over the years, it has evolved various export credit risk insurance products to suit therequirements of Indian
exporters and commercial banks. ECGC is the seventh largest credit insurer of theworld in terms of coverage of national exports. The
present paid up capital of the Company is Rs. 900 Croresand the authorized capital is Rs. 1000 Crores.

The types of insurance protection provided by ECGC include:

A range of credit risk insurance covers to exporters against loss in export of goods and services

Guarantees to banks and financial institutions to enable exporters to obtain better facilities from them

Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan.

The main objectives of the ECGC:

To protect exporters o-f India, from credit risks, arising from commercial and political reasons, To protect banks in India, from
risks of default or protracted delay in payment by the exporters, in respect of export finance, and

To encourage exporters to search out new markets and new importers abroad, by the ECGC underwriting the major part of
the credit risks. Objective and Function of ECGC

The Corporation has set before itself the following objectives:

1. To encourage and facilitate globalization of India’s trade.

 2. To assist Indian exporters in managing their credit risks by providing timely information on worthiness of the buyers,
bankers and the countries.

3. To protect the Indian exporters against unforeseen losses, which may arise due to failure of the buyer, bank or problems
faced by the country of the buyer by providing cost effective credit insurance covers in the form of Policy, Factoring and
Investment Insurance Services comparable to similar covers available to exporters in other countries.

4. To facilitate availability of adequate bank finance to the Indian exporters by providing surety insurance covers for bankers
at competitive rates.

5. To achieve improved performance in terms of profitability, financial and operational efficiency indicators and achieve
optimum return on investment.

6. To develop world class expertise in credit insurance among employees and ensure continuous innovation and achieve the
highest customer satisfaction by delivering top quality service.

7. To educate the customers by continuous publicity and effective marketing

INVESTMENT BANK
Investment banks are defined as companies that help other companies in increasing financial capital in the capital markets, through
things like issuance of stock and bonds. An Investment bank offer financial services for clients, such as the trading of derivatives, fixed
income, foreign exchange, commodity and Equities or advisory services for mergers and acquisitions. Investment banks perform, Initial
Public offerings (IPO), trades on securities and bonds and they also act as brokers.

Investment banks have many functions to perform. Some of the most important functions of investment banking are as follows:

IPOs: Investment Banks facilitate public and Private Corporation’s Initial Public Offering known as IPO (issuing securities in the primary
market) by providing underwriting services. Other services include acting as intermediaries in trading for clients and foreign exchange
management.

Investment management: Investment Bankers also provide advice to investors to purchase, manage and trade various securities
(shares, bonds, etc.) and other assets like real estate, hedge fund, mutual funds etc. Investors may be financial institutions or big fund
houses or private investors. The investment management division of an investment bank is divided into separate groups, namely,
Private Wealth Management and Private Client Services.

Boutiques: Small investment banking firms providing financial services are called boutiques. These mainly specialize in trading bonds,
advising for mergers and acquisitions, providing technical analysis etc

Mergers and Acquisitions: Another major function of the investment banking include mergers and acquisitions (M&A) and corporate
finance which involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target.

Structuring of Derivatives: This has been a relatively recent division which involves highly technical and numerate employees working
on creating complex structured derivative products which typically offer much greater margins and returns than underlying cash
securities.

Merchant banking is nothing but the private equity activity of investment banks. Goldman Sachs Capital Partners and JPMorgan’s One
Equity Partners are the current examples. (Note: Originally, “merchant bank” was the British English term for an investment bank.)

Research is another important function of an Investment bank which reviews companies and writes reports about their prospects with
“buy” or “sell” ratings. Though this division does not generate direct revenues, the information gathered or produced by them is used
to guide investors and in some cases for Mergers and Acquisitions.

Risk management is a continuously ongoing activity which involves analyzing the market and credit risk that traders are taking onto the
balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent
‘bad’ trades having a detrimental effect to a desk overall.

In general, Investment banks

Acts as intermediary between issuers and investors

Provides Strategic, financial and valuation advisory services.

Raises capital through the issuance of securities, private equity and debt.

Advises companies in merger & acquisition and restructuring transactions

Provides special products and services to the corporate and government clients.

Investment Banking in India – Scope and Structure:

General usage would hardly sanction any single clear-cut and definite distinction between commercial and investment banking. The
factor which is most frequently used in making rough practical distinctions between the two is that of the commercial banking involving
short-terms advances to borrowers, while investment banking involves long-term advances which generally are represented by
negotiable securities.

But, as will be seen below, other factors, which as the purpose of the loan, the character of the institution making it, etc., are also
frequently to be considered in making a full distinction between these two concepts as they are customarily employed in current usage.

Although there is no intrinsic reason why this must necessarily be the case, commercial banking institutions operate in the main
through the system of deposit and discount, while investment banking is carried on through the purchase of security issues and their
subsequent sale, at a profit, to investors.

Commercial paper may be bought and sold like securities; and commercial banks, after making short-term loans, may rediscount such
paper with a Federal Reserve Bank. On the other hand, the savings bank, an investment banking institution, receives deposits in much
the same way as to commercial banks, but uses the proceeds to buy securities in the capital market and make mortgage loans.

Further-more, investment houses have been known to keep short-term securities purchased from issuing governments and
corporations until their maturity, instead of selling them to others. Hence, from the point of view of method of operation, only rough
and approximate distinctions can be made.

This distinction, however inadequate and approximate, must not be regarded on that account as any the less real and fundamental.
The fact that the community is not always willing to classify its banking practices does not of itself reduce the need for keeping these
distinctions clearly in mind in the management of banks.

The distinctions indicated above grow out of the essential nature of the banking business. Successful banking over long periods will
invariably be dependent upon recognition of the necessity of adapting asset holdings to the nature of the liabilities incurred.

In any case, it must be remembered that the two divisions of banking are closely related, and in practice one cannot be adequately
understood without a knowledge of the other. Thus, one connection between the two is found in the fact that the commercial banker
is the custodian of the liquid funds of the community, so that when an individual wishes to put his money into investment securities to
be purchased from or through an investment banker, he draws the amount he needs out of the commercial bank.

Thus, inflation or deflation of commercial bank deposits profoundly affects the volume of funds available in the security markets. It is
also true that the commercial banker often finds it desirable, in order to keep his own resources at work, to purchase securities which
are issued by an investment banker.

In what has been said thus far, reference has been made to investment and commercial banking as distinct types of financial
operations. But it is not possible to pick out or designate certain commercial banks as carrying on the one kind of banking, and certain
investment banks as carrying on the other.

This clean-out functional distinction is permissible for the purpose of clarifying underlying ideas, but it does not correspond to what is
found in practice. It is, therefore, necessary to consider commercial and investment banking also from the institutional view-point, and
see how actual banking institutions carry on one, or the other, or both types of operations.

For many years banking or financial institutions have existed which have carried on both kinds of banking concurrently- the practice
prevails now perhaps more than ever. The evolution of pure investment banking institutions on a large scale began with the
stabilization of government credit in Western Europe and the consequent growth of popular investment in government securities.

This resulted in the formation of houses of issue, such as those of the early generations of the Rothschild’s. The vast development of
corporate financing in recent decades has enormously expanded the field of operation of such firms in buying, selling and dealing in
securities. At the same time, many institutions have exercised both commercial banking functions and some, or in a few cases all, of the
investment banking functions.

FACTORS THAT AFFECT FOREIGN EXCHANGE RATES

1. Inflation Rates

Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than another's will see an
appreciation in the value of its currency. The prices of goods and services increase at a slower rate where the inflation is low. A country
with a consistently lower inflation rate exhibits a rising currency value while a country with higher inflation typically sees depreciation
in its currency and is usually accompanied by higher interest rates
 

2. Interest Rates

Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest rates, and inflation are all correlated.
Increases in interest rates cause a country's currency to appreciate because higher interest rates provide higher rates to lenders,
thereby attracting more foreign capital, which causes a rise in exchange rates
 

3. Country’s Current Account / Balance of Payments

A country’s current account reflects balance of trade and earnings on foreign investment. It consists of total number of transactions
including its exports, imports, debt, etc. A deficit in current account due to spending more of its currency on importing products than it
is earning through sale of exports causes depreciation. Balance of payments fluctuates exchange rate of its domestic currency.
 

4. Government Debt

Government debt is public debt or national debt owned by the central government. A country with government debt is less likely to
acquire foreign capital, leading to inflation. Foreign investors will sell their bonds in the open market if the market predicts government
debt within a certain country. As a result, a decrease in the value of its exchange rate will follow.
 

5. Terms of Trade

Related to current accounts and balance of payments, the terms of trade is the ratio of export prices to import prices. A country's terms
of trade improves if its exports prices rise at a greater rate than its imports prices. This results in higher revenue, which causes a higher
demand for the country's currency and an increase in its currency's value. This results in an appreciation of exchange rate.
 

6. Political Stability & Performance

A country's political state and economic performance can affect its currency strength. A country with less risk for political turmoil is
more attractive to foreign investors, as a result, drawing investment away from other countries with more political and economic
stability. Increase in foreign capital, in turn, leads to an appreciation in the value of its domestic currency. A country with sound
financial and trade policy does not give any room for uncertainty in value of its currency. But, a country prone to political confusions
may see a depreciation in exchange rates.
 

7. Recession

When a country experiences a recession, its interest rates are likely to fall, decreasing its chances to acquire foreign capital. As a result,
its currency weakens in comparison to that of other countries, therefore lowering the exchange rate.

8. Speculation

If a country's currency value is expected to rise, investors will demand more of that currency in order to make a profit in the near
future. As a result, the value of the currency will rise due to the increase in demand. With this increase in currency value comes a rise in
the exchange rate as well

What is Foreign exchange

Foreign exchange means taking at one centre a particular Currency and giving out at the other centre in other Currency. For example to
take USD 100000 from Dubai against Export Bill (export invoice) rose from India and give out the US Dollars 100000 in Rupee in India. In
other words, conversions of one currency taken from one centre into other currency by giving at other centre.

Nostro Account

Home Currency of one country is foreign currency for other country. Conversion of foreign currency in to home currency is the
fundamental of foreign exchange. Therefore in order to put through the foreign exchange transaction, the bank which is authorized to
deal in foreign exchange, maintains an account with its overseas Bank to keep stocks of foreign currencies. Normally, such account is a
current account in the books of the overseas Bank. For example, an Indian bank authorized to deal in foreign exchange maintain an
account  with overseas bank in USA in US Dollar  such account  maintained in the foreign currency at foreign center by Indian bank is
said as ‘Nostro Account’ . Nostro is an Italian word which literally means ‘Our’. So the ‘Nostro Account’ of the Indian bank with its
branch/correspondents in USA is said as ‘Our Accounts with You’

Vostro Account

For the similarly reason, foreign bank of other country authorized to deal in foreign currency maintains an accounts with overseas Bank
to keep stocks of foreign currencies (home currency of the country in which the overseas branches/ correspondents is situated) for the
purpose of putting through the foreign exchange transactions. For example XYZ bank of USA maintains an account with a Bank in India
in Indian Rupee such account maintained in the foreign currency at foreign center by Foreign bank is said as ‘Vostro Account’. ‘Vostro’
is an Italian word which literally means ‘Your’. So the ‘Vostro Account’ of the foreign bank with Indian bank in India is said as ‘YOUR
Accounts with Us’.

NRI Accounts

 Non-Resident Rupee (NRE) Account

The NRE account is an Indian Rupee denominated account and it gives you complete security. It can be in the form of savings, current,
recurring or fixed deposits. One can deposit only foreign currency in this account, which gets converted into INR at the time of deposit.
Therefore, you may repatriate the money in this account (plus interest earned) any time. And the interest is not taxable.  

Transferring money from the resident country to India is free, and you can earn higher interest too. The international debit card
enables you to transact and withdraw money 24*7. Also, mutual fund investments too become easier and instant, if you link your NRE
account number to the investment account.

Non-Resident Ordinary Rupee (NRO) Account

An NRO account, on the other hand, is a savings or current account held in India for the NRIs to manage their income earned in India.
Hence, it is a good way for account holders to deposit and manage their accumulated rupee funds. Once you deposit the money to the
NRO account, the foreign currency is automatically converted to INR. 

You can apply for an NRO account jointly with a resident Indian in which the bank will give you both an NRO debit card each. It is even
feasible to transfer money from your current NRE account. However, the interest you earn in this account is subject to Tax Deducted at
Source (TDS)

GOALS OF MNC

Profit

People on both sides of the controversies that rage around the activities of multinational corporations acknowledge that their primary
goal is to maximize profits. Shareholders and supporters see this as a positive trait that improves economies and benefits people, while
opponents accuse the profit motive of encouraging exploitation of the poor and environmental destruction. Movements such as
Corporate Social Responsibility, or CSR, attempt to temper the profit motive by making corporations more accountable to communities
and the natural world, encouraging them to re-invest some of their profits in social programs and environmental protection.
Market Dominance

A corporation can most effectively protect its profits by achieving market dominance. This involves extensive advertising, producing a
product that appeals to the public and squeezing out competitors through efficient production techniques and high sales. Market
dominance helps a multinational corporation thrive in good economic times and survive during lean times. A competitive economic
system favors companies who are able to outperform their competitors. While many countries have laws against monopolistic business
practices, a well-honed corporation can effectively dominate a market while steering clear of practices that could actually be labeled as
a monopoly.

Innovation

A growth-based economic system requires corporations to continually invent, develop and market new products to expand their
market share. This process requires large investments in research and development. A central goal of a multinational corporation is to
remain more innovative than its competitors, and to anticipate what products will be most profitable in the coming years. The
corporation must then get that product into the market. Competitors will copy a successful idea as soon as it is made public, so
corporations put great effort into keeping innovative ideas secret until they can be publicly released as fully developed products.

Expansion

Multinational corporations are required to maximize returns for their shareholders, and this requires constant expansion to keep
profits growing. Expansion may take the form of growth within a company, or it may manifest itself as friendly or hostile takeovers of
other companies. Mergers and acquisitions form a large percentage of corporate growth within a market that is largely saturated in
terms of growth potential. Companies that weaken or whose growth slows are at greater risk of takeover by other companies

BALANCE OF PAYMENTS

What is ‘Balance of Payment’?

Balance Of Payment (BOP) is a statement which records all the monetary transactions made between residents of a country and the
rest of the world during any given period. This statement includes all the transactions made by/to individuals, corporates and the
government and helps in monitoring the flow of funds to develop the economy. When all the elements are correctly included in the
BOP, it should sum up to zero in a perfect scenario. This means the inflows and outflows of funds should balance out. However, this
does not ideally happen in most cases.

BOP statement of a country indicates whether the country has a surplus or a deficit of funds i.e when a country’s export is more than its
import, its BOP is said to be in surplus. On the other hand, BOP deficit indicates that a country’s imports are more than its exports.
Tracking the transactions under BOP is something similar to the double entry system of accounting. This means, all the transaction will
have a debit entry and a corresponding credit entry.

Why balance of payment is vital for a country?

A country’s BOP is vital for the following reasons:

 BOP of a country reveals its financial and economic status.

 BOP statement can be used as an indicator to determine whether the country’s currency value is appreciating or
depreciating.

 BOP statement helps the Government to decide on fiscal and trade policies.

 It provides important information to analyze and understand the economic dealings of a country with other
countries.

By studying its BOP statement and its components closely, one would be able to identify trends that may be beneficial or harmful to the
economy of the county and thus, then take appropriate measure
Elements of balance of payment

There are three components of balance of payment viz current account, capital account, and financial account. The total of the current
account must balance with the total of capital and financial accounts in ideal situations

Current Account

The current account is used to monitor the inflow and outflow of goods and services between countries. This account covers all the
receipts and payments made with respect to raw materials and manufactured goods. It also includes receipts from engineering,
tourism, transportation, business services, stocks, and royalties from patents and copyrights. When all the goods and services are
combined, together they make up to a country’s Balance Of Trade (BOT).

There are various categories of trade and transfers which happen across countries. It could be visible or invisible trading, unilateral
transfers or other payments/receipts. Trading in goods between countries are referred to as visible items and import/export of services
(banking, information technology etc) are referred to as invisible items. Unilateral transfers refer to money sent as gifts or donations to
residents of foreign countries. This can also be personal transfers like –  money sent by relatives to their family located in another
country.

Capital Account

All capital transactions between the countries are monitored through the capital account. Capital transactions include the purchase and
sale of assets (non-financial) like land and properties. The capital account also includes the flow of taxes, purchase and sale of fixed
assets etc by migrants moving out/in to a different country. The deficit or surplus in the current account is managed through the
finance from capital account and vice versa.

There are 3 major elements of capital account:

 Loans & borrowings – It includes all types of loans from both the private and public sectors located in foreign
countries.

 Investments – These are funds invested in the corporate stocks by non-residents.

 Foreign exchange reserves – Foreign exchange reserves held by the central bank of a country to monitor and control
the exchange rate does impact the capital account.

Financial Account

The flow of funds from and to foreign countries through various investments in real estates, business ventures, foreign direct
investments etc is monitored through the financial account. This account measures the changes in the foreign ownership of domestic
assets and domestic ownership of foreign assets. On analyzing these changes, it can be understood if the country is selling or acquiring
more assets (like gold, stocks, equity etc).

Illustration if for the year 2018 the value of exported goods from India is Rs. 80 lakhs and the value of imported items to India is 100
lakhs, then India has a trade deficit of Rs. 20 lakhs for the year 2018.

BOP statement acts as an economic indicator to identify the trade deficit or surplus situation of a country. Analyzing and understanding
the BOP of a country goes beyond just deducting the outflows of funds from inflows. As mentioned above, there are various
components of BOP and fluctuations in these accounts which provide a clear indication about which sector of the economy needs to be
developed.

IMF (International Monetary Fund)

Origin of IMF:
The origin of the IMF goes back to the days of international chaos of the 1930s. During the Second World War, plans for the
construction of an international institution for the establishment of monetary order were taken up.

At the Bretton Woods Conference held in July 1944, delegates from 44 non-communist countries negotiated an agreement on the
structure and operation of the international monetary system.

The Articles of Agreement of the IMF provided the basis of the international monetary system. The IMF commenced financial
operations on 1 March 1947, though it came into official existence on 27 December 1945, when 29 countries signed its Articles of
Agreement (its charter). Today (May 2012), the IMF has near-global membership of 188 member countries. Virtually, the entire world
belongs to the IMF. India is one of the founder- members of the Fund.

Objectives:

Article 1 of the Articles of Agreement (AGA) spell out 6 purposes for which the IMF was set up.

These are:

I. To promote international monetary cooperation through a permanent institution which provides the machinery for consolation and
collaboration on international monetary problems.

II. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance
of high levels of employment and real income and to the development of the productive resources of all members as primary objective
of economic policy.

III. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange
depreciation.

IV. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the
elimination of foreign exchange restrictions which hamper the growth of world trade

V. To give confidence to members by making the general resources of the Fund temporarily available to them under adequate
safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments, without resorting to
measures destructive of national or international prosperity

VI. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balance of
payments of members

Functions:

Regulatory Function:

The Fund functions as the guardian of a code of rules set by its (AOA— Articles of Agreement).

Financial Function:

It functions as an agency of providing resources to meet short term and medium term BOP disequilibrium faced by the member
countries.

Consultative Function:

It functions as a centre for international cooperation and a source of counsel and technical assistance to its members.

The main function of the IMF is to provide temporary financial support to its members so that ‘fundamental’ BOP disequilibrium can be
corrected. However, such granting of credit is subject to strict conditionality. The conditionality is a direct consequence of the IMF’s
surveillance function over the exchange rate policies or adjustment process of members.
WTO (World Trade Ortganisation)

Structure of the WTO:

The WTO secretariat (numbering 625 of many nationalities) is headed by Director General. However, the WTO is headed by the
Ministerial Conference who enjoys absolute authority over the institution. It not only carries out functions of the WTO but also takes
appropriate measures to administer the new global trade rules. In addition to these, the structure of the WTO consists of a General
Council to oversee the WTO agreement and ministerial decisions on a regular basis.

The Council sits in its headquarters Geneva, Switzerland usually once a month. Besides General Council, there is the Council for Trade in
Goods, the Council for Trade in Services, the Council for Trade Related Intellectual Property Rights (TRIPS). These Councils and their
respective subsidiary bodies perform their respective functions.

Decision-making is made by consensus. If consensus is not reached then majority voting plays the crucial rate. The significant task
facing the WTO is that of making the new multilateral trading system truly global. Implementation of WTO agreements and ministerial
decisions are crucial to credibility of the multilateral trading system and indispensable for expanding global trade, creating additional
jobs and improving the standard of living.

Functions of the World Trade Organisation:

i. It shall facilitate the implementation, administration and operation of the WTO trade agreements, such as multilateral trade
agreements, plurilateral trade agreements.

ii. It shall provide forum for negotiations among its members concerning their multilateral trade relations.

iii. It shall administer the ‘Understanding on Rules and Procedures’ so as to handle trade disputes.

iv. It shall monitor national trade policies.

v. It shall provide technical assistance and training for members of the developing countries.

vi. It shall cooperate with various international organisations like the IMF and the WB with the aim of achieving greater coherence in
global economic policy-making.

Objectives of the WTO:

1. To ensure the reduction of tariffs and other barriers to trade.

2. To eliminate discriminatory treatment in international trade relations.

3. To facilitate higher standards of living, full employment, a growing volume of real income and effective demand, and an increase in
production and trade in goods and services of the member nations.

4. To make positive effect, which ensures developing countries, especially the least developed secure a level of share in the growth of
international trade that reflects the needs of their economic development.

5. To facilitate the optimal use of the world’s resources for sustainable development.

6. To promote an integrated, more viable and durable trading system incorporating all the resolutions of the Uruguay Round’s
multilateral trade negotiations.

Above all, to ensure that linkages trade policies, environmental policies with sustainable growth and development are taken care of by
the member countries in evolving a new economic order

IBRD OR WORLD BANK

Objectives:
1. To provide long-run capital to member countries for economic reconstruction and development.

2. To induce long-run capital investment for assuring Balance of Payments (BoP) equilibrium and balanced development of
international trade.

3. To provide guarantee for loans granted to small and large units and other projects of member countries.

4. To ensure the implementation of development projects so as to bring about a smooth transference from a war-time to peace
economy.

5. To promote capital investment in member countries by the following ways;

(a) To provide guarantee on private loans or capital investment.

(b) If private capital is not available even after providing guarantee, then IBRD provides loans for productive activities on considerate
conditions.

Functions:

1. World Bank provides various technical services to the member countries. For this purpose, the Bank has established “The Economic
Development Institute” and a Staff College in Washington.

2. Bank can grant loans to a member country up to 20% of its share in the paid-up capital.

3. The quantities of loans, interest rate and terms and conditions are determined by the Bank itself.

4. Generally, Bank grants loans for a particular project duly submitted to the Bank by the member country.

5. The debtor nation has to repay either in reserve currencies or in the currency in which the loan was sanctioned.

6. Bank also provides loan to private investors belonging to member countries on its own guarantee, but for this loan private investors
have to seek prior permission from those counties where this amount will be collected.