BoP: 

It is the systematic record of economic transactions between Residents & Non-

Residents for a specific time period -usually one year. It includes all outflows and
inflows.
It is maintained by RBI as prescribed by IMF in BPM-6 [Balance of Payments]
Manual in $ only & it contains data of the previous year only.
Incoming money=credit=+ve
outgoing money=Debit= -ve 
So sum of World's BoP is zero.

Components of BoP:

1. Current Account
2. Capital Account

 Current Account is maintained by RBI on behalf of GoI.

 India had surplus Current Account for 3 consecutive years (2000-03).

 Net BoP is determined on the basis of net Capital Inflow of current Account &
Capital Account. If it is +ve then excess $ goes to Forex Reserves of RBI thus
making BoP as zero.
 If BoP is +ve then RBI should buy those excess $ bcz if there is excess supply
of $ in the market then will appreciate Rupee thus making exports expensive.
 If BoP is -ve then RBI should infuse $ into the market from its Forex Reserve
as shortage of $ will depreciate Rupee thus making Imports Expensive.
 India's Main Imports:
Balance of Trade: Difference between
Exports & Imports. 1. POL: Petroleum,Oil & Lubricants: Crude O
2. Gold & Silver: 10% of total Imports :800-9
1. Trade Surplus: EX>IM of gold per year
2.  Trade Deficit:  EX<IM: $100 Billion 3. Pearl, precious stones
4. Coal, coke etc.
5. Electronics OR Chemicals Fertilizers
6. Capital Goods: Heavy Machinery

India's Main Exports:

India's Top Export Countries:
1. Petroleum Products: 20%
1. America 16%
2. Gems & Jewellery: 13%
2. UAE 10%
3. Agricultural & Allied Products: 12%
3. China
4. Textiles Products: 12%
4. Hong kong
5. Chemicals Products: 10%

Services: Transfers:
[] Top Destination
 ICT: Information & Communication Technologies:
Business service  India: $76 Bn-2020
 Travel  China
 Transport  Mexico
 Consultancy

[]Top Source
[]Trade Deficit in Goods+Services
 USA
 Saudi
 Russia

Remittance: Global migration report 202

⇒ The International Organization for Mi
As per its latest Global migration report 2
⇒ Top number of international migrants
⇒ Top destination country of migrants ac
 ⇒ Top amount of remittance received to
⇒ Corona: India remittance to fall from $
Net Terms of Trade (NTT) or Commodity terms of trade:
𝑁𝑇𝑇= [ 𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡 / 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑚𝑝𝑜𝑟𝑡 ] ∗100=𝑓𝑜𝑟 𝐼𝑛𝑑𝑖𝑎 𝑖𝑡′𝑠 <100.

Gross (Barter) Terms of Trade (GTT)

𝐺𝑇𝑇= [𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (𝑜𝑟 𝑣𝑜𝑙𝑢𝑚𝑒) 𝑜𝑓 𝑖𝑚𝑝𝑜𝑟𝑡 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 /  (𝑜𝑟 𝑣𝑜𝑙𝑢𝑚𝑒) 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡 ] ∗100=𝑓𝑜𝑟
𝐼𝑛𝑑𝑖𝑎 𝑖𝑡′𝑠 <100.
So, in physical quantity (kg, litres) we are exporting more than importing. This is possible
because exported Indian rice’s quantity (kg) could be large even though its value ($) will not be
very large.

Income terms of trade (ITT)

𝐼𝑇𝑇=(𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡/ 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑚𝑝𝑜𝑟𝑡 )∗(𝑄𝑢𝑎𝑛𝑡𝑢𝑚 𝑖𝑛𝑑𝑒𝑥 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 𝑄𝐼𝐸)=(𝑁𝑒𝑡 𝑡𝑒𝑟𝑚𝑠
𝑜𝑓 𝑡𝑟𝑎𝑑𝑒)∗ (𝑄𝐼𝐸)
For India and other developing countries, ITT is much relevant indicator for analysing their
foreign trade compared to previous 2 indicators.

Net International Investment Position (NIIP)= value of overseas assets owned by a nation
minus the value of domestic assets owned by foreigners.
 Positive NIIP value = creditor nation
 Negative value = debtor nation, USA highest, India (debtor nation) at 8th place (in 2018)
 Budget-2019: Indian Development Assistance Scheme (IDEAS) provides concessional loans
to developing countries. We’ll revamp this scheme.

CAD (Current Account Deficit):

 India's CAD (Current Account Deficit)  in last 3 months of 2016 =$8
Billion=1.4% of GDP
 CAD for 2012-13: $88 Billion: 4.8% of GDP
 CAD for 2015-16: $22 Billion: 1.1% of GDP
 CAD for  H1 2016-17: 3.7 Billion $ : 0.3% of GDP: Low Crude Oil Prices &
Decline in Gold Imports: Low CAD

CAD is bad bcz:

 It weakens our currency: Expensive Crude oil import: Higher Transportation

cost: Higher Inflation
 It can lead to BoP Crisis 
Solution: 1. Promote exports  2. reduce imports

1. Export Promotion Policies

> FTP: Foreign Trade Policy 2015

> under Director General of Foreign Trade (DGFT) under Ministry of Commerce.
year Export ($ Billion)  share in total World Export

2013 465 2%

31st March 2020

900 3.5%
extended till 30/9/2021
> Duty free import of capital goods (machinery required for production
> Advance Authorization Scheme:  allows duty free import of inputs, along with fuel, oil,
catalyst, etc., required for manufacturing export product.
> Niryat Bandhu Scheme: Govt mentors the new and potential exporters and mentor them
through training, counselling, orientation programmes
> Towns of Export Excellence (TEE)  and Trade Infrastructure for Export Scheme (TIES):
where Union gives ₹ for infra development for export (warehouses, transportation, packaging
facilities etc.)
✓ E-governance initiatives →
○ CBIC → Single Window Interface for Facilitating Trade (SWIFT) for importers and exporters
through icegate.gov.in. Within that, e-governance modules like E-Sanchit,
Turant etc for document approval etc.
○ Commerce Ministry & FIEO (Federation of Indian Export Organisations) launched India
Trade web portal and Niryat Mitra App.

 SEIS: Service Export from India Scheme: 2015-17

 $ 5 scrip for every $100 service exported 

 this scrip can be used in payment of taxes 
 faster clearance etc
 under M/o Commerce

 MEIS: Merchandise Export from India Scheme

> under M/o Commerece

> provide tax credit to exporters, which they can use for paying Union’s Customs Duty. AFTER
RODTEP is notified fully, the MEIS scheme will be STOPPED.
Export Preparedness Index by NITI (2020,Aug) :
⇒ It ranks the Indian states based on State government policies, infrastructure, transport
connectivity, ease of doing business etc.
⇒ Overall, most of the Coastal States are the best performers.
⇒ Top-3 (2020): Gujarat > Maharashtra > Tamil Nadu.

[]SEZ: Special Economic Zone: Duty free enclaves which are treated as foreign
territory for trade operations,duties,tariffs & marked by best infrastructure & least red
tape.
                These are aimed at attracting direct investment for export-oriented
production.
Benefit? More exports, employment, economic growth.
⇒ Challenges? SEZ entrepreneurs use legal loopholes → Tax avoidance, Workers deprived of
EPFO/ESIC/Maternity benefit. When entrepreneurs’ Tax holiday is over in one SEZ, they
shutdown operation and move to another SEZ with new name/registration. Agricultural and
forest lands diverted to build SEZs → future challenges in food security, pollution control and
climate change.

        🕵Baba Kalyani report on SEZ

1. While the number of SEZ & SEZ-led employment has ⏫, but their export growth rates were
not encouraging in the last decade.
2. Instead of giving blanket-general-tax-holiday, SEZ-units should be given tax benefits linked to
how many job created, how much FDI investment attracted, how much goods/services exported
etc.
3. SEZs should be converted into Employment and Economic Enclaves(3Es) with efficient
transport infrastructure, uninterrupted water and power supply. (So, both
domestic-consumer-centric entrepreneurs and export-centric entrepreneurs can operate from
same locality, supply each other with intermediate goods/services. While export-wallas get
further tax benefits in Customs Duty & Direct Taxes.)
4 Encourage MSMEs in 3Es, so we can create more jobs.
5. Develop infrastructure: High Speed Rail, Express roadways, Passenger/Cargo airports,
shipping ports, warehouses etc. near SEZ/3Es zones.
6. Focus on electronics for domestic production for domestic consumers, and need to have a plan
for import substitution (i.e. encourage Swadeshi electronics companies in 3Es, so Indians buy
import less VIDESHI products).
✍Conclusion in SEZ related Mains Qs? Government of India has set a target of creating 100
million jobs and achieving 25% of GDP from the manufacturing sector by 2022, as part of its
flagship
‘Make in India’, so above reforms / recommendations will help achieving these targets.

 TIES: Trade Infrastructure for Export Scheme: Commerce Ministry to give

max 20 cr grant in each of infrastructure project.
  GIFT City= Gujarat International Finance Tec-City = India's 1st IFSC in
Gandhinagar, Gujarat

 GIFT ltd.: SPV which is JV between ILFS (Infra Leasing & Financial Services
Limited) & Guj Urban Development Corp.
 ILFS is promoted by SBI,LIC,UTI,HDFC
 Belgium: 1st to open consulate here
 Yes Bank Branch crossed $1 Bn Business here 
 to boost financial services.

IFSC=International Finance Services Centre

IFSC refers to the customers that are outside of jurisdiction of domestic

economy.

e.g. Singapore,New york ,Shanghai and Dubai are also emerging as IFSCs.

IFC in Dubai UAE: 

 100% FDI
 100% Capital Acct Convertibility 
 0% Tax for 50 years 
 Independent Judiciary 
 Quick visa
 DTAA with most countries 

    
Necessary for IFSC
Functions of IFSCs
1 Fund raising2 wealth management3 asset management  Rational legal regula
4 merger and acquisitions infrastructure
 Sustainable local eco
 India's 1st International Exchange= India INX a subsidiary  Stable political envir
of BSE  Strategic location
 Good quality of life

IFSC Authority Act, 2019

 IFSC (such as GIFT city) are setup under the SEZ Act.
  IFSC get relief / exemption in the Indian tax laws. Further, RBI, SEBI, IRDAI and other
regulators’ norms also apply in relaxed manner. E.g. Bank branches in GIFT-city-IFSC
are exempted from RBI’s CRR-SLR-PSL etc. norms.

✓ 2019’s Act aim to setup a statutory International Financial Services Centres Authority with
- One Chairperson
- One member each nominated from RBI,SEBI, IRDAI, PFRDA
- + few other members from Finance ministry etc
- Tenure? 3 years. Re-appointment? Yes, possible.
✓ The IFSC Authority will regulate all financial services, products, institutions in International
Financial Services Centres of India.
 2020-April: Government announced its headquarter will be at Gandhinagar, Gujarat. (Since
Gandhinagar is the only place with an IFSC at present, i.e. GIFT City)

2. Reduce Gold Imports: India 2nd largest Gold importer after China

 99% of total domestic production of gold: Karnataka & rest 1 % from

Jharkhand 
 Rest demand is fulfilled by importing gold from Switzerland, UAE & S Africa.

     
> RBI’s 80:20 Scheme (2013-14):
- RBI mandated that minimum 20% of the imported gold must be exported back. Until then the
Jeweller/ bullion dealers will not get permission to (convert their rupees into dollars / foreign
currency) to import next consignment of gold.
- RBI gets this power under Foreign Exchange Management Act (FEMA).
Although, 2014: Scheme was stopped as the gold craze had declined.

> Sovereign Gold Bond Scheme: 2015: RBI (on behalf of Union Government)
issued Gold bonds in the denominations of one gram and its multiples.
⇒ They can be purchased from commercial banks, post offices and authorised agents.

 Series 3: 2017-18: Opened from Oct to Dec: Monday to Wed

 Min 1gm
 GST Exempted
 Max Limit increased from 500 gms to 4 Kgs & 20Kgs for Trusts
 2.5% Coupon paid Half-yearly & Duration: 8 years
 Premature withdrawal after 5 years
 Can be traded on Stock Exchange & can be used as Loan Collateral 
 Interest Taxable & CGT Exempted if HTM
 Gold Reserve Fund to cover Price Risk of Gold
 Price: 2956/gm 999 Purity & Rs 50 discount for DEMAT
 Bonds eligible for SLR Purposes
> Gold Monetization Scheme (2015)
- Under this scheme, RBI allows commercial banks accept customers’ idle gold / jewellery for 1
year to 15 years tenure. (2019- RBI also allowed Charitable Institutions and Central Govt to
deposit their gold in the commercial banks)
- Commercial Banks pay the depositor ~2% interest.
- Min. 30gm to maximum any amount of gold can be deposited.
- Gold goes to → Metals and Minerals Trading Corporation of India →
- Gold sold to jewellers, electronic circuits companies and
- Some of the gold used for Minting “Indian Gold Coin.”
- Upon maturity you can redeem deposit in the form of gold coin/bars or cash equivalent. The
profit exempted from Capital Gains Tax.

> Indian (Sovereign) Gold Coins (2015): Issued by a Govt company “Metals and Minerals
Trading Corporation of India”.
- Available in denominations of 5, 10, 20 grams.
- These gold coins are not fiat money because not issued under the powers of Coinage act, they
don’t bear any markings indicating rupee denominations. Their markings only indicate gold
grams. And since they’re not ‘fiat money’ → so, not ‘legal tenders’.
- Benefit? Trusted Purity → Easily resold → Easy liquidity, and Profit (if) gold price⏫.

3. Reduce Crude Imports: Govt’s target of reducing oil import by 10% by 2022
(compared to 2015).

> India's biggest oil suppliers: 1) Iraq 2) USA 3) Saudi.

> make Strategic Reserves to buy more crude oil when international prices are low.
 
[]ISPRL: Indian Strategic Petroleum Reserves Limited: SPV under Petro Ministry 

 5 MMT (Million Metric Tons) Capacity

 Mangalore
 Padur Kerala
 Vishakhapatnam AP
 Bikaner Raj.
 Chandikhole Odisha 

Convertibility: When Rupee can be converted into other currencies (mainly $ ) at the
prevailing market rate for Current Account & Capital Account transaction
purposes.Generally it is concerned with $ outflow only.
> Freedom to convert
> convert at market rates
> Liberalization of inflow
> Liberalization of outflow
RBI can not intervene always as it has fixed forex reserves which will vanish.So a
quantitative restriction is necessary for conversion in order to insure stability.

1. Indian Rupee is FULLY Convertible for CURRENT Account Transactions

only since 1994.
2. Indian Rupee is PARTIALLY Convertible [40%] for CAPITAL Account
Transactions. e.g. Individuals are allowed to invest only a max. of 75000$ in
foreign.

         (Rupee is said to be fully convertible when there is no sectoral cap on FDI i.e.
100% FDI is allowed and Indian companies can borrow any amount from foreign
creditors through ECB route without approval of RBI.)
       No investment is allowed in Non-Cooperative countries like North Korea as
identified by FATF
       Under Liberalised Remittance Scheme[LRS] 2004 Indian Residents can spend
up to $2.5 Lakh abroad in addition to other limits under FEMA.
    
Capital Account Convertibility:
Tarapore committee 1997 favoured full convertibility (but with some pre-conditions
such as low NPA, low Deficit etc.) as it will lead to more growth etc.
HR Khan opposed it as no such correlation was found between convertibility &
growth.
Full convertibility may result in:

1. As exchange rate has to be fully floating then it will become more volatile.
2. Risk of capital flight if there is macroeconomic/political instability.
3. Forex Reserves will be insufficient leading to BoP crisis as happened in
Malaysia & Indonesia [East Asian Crisis 1997]

Advantages:

1. Availability of more foreign capital for investment.

2. FII inflows provide more liquidity and help in modernizing domestic market.
3. creates competition for domestic players.
4. offers wide range of choices for investment and borrowing.
5. provide access to latest tools and technologies.

Disadvantages:

1. Full Capital account convertibility must be calibrated otherwise it may be quite

destabilizing.
 2. Rupee not being a hard currency, can be subjected to volatility with serious
effects.
3. FDI hike in defence sector need to be discussed and checked.
4. It may hurt domestic interests as it can create unemployment.

Prerequisites for full Capital account convertibility:

 Low NPA
 Low fiscal deficit
 Inflation and rates of interest should be minimal
 Adequate Forex reserves.

=> Full convertibility is necessary for making India a global hub but it has to backed
by many strong macroeconomic indicators like low inflation,low fiscal deficit,low
NPA, strong banking system,Enough Forex Reserves for 6 months import to avoid
BoP crisis etc.This transition process has to be slow & smooth.
India's Forex Reserve Components:

1.  Foreign Currency Assets ((includes foreign currencies & G-Sec/bonds of

foreign Govts): $350 Bn
2.  Gold Reserve $20 Bn
3.  Reserve Tranche Position RTP in the IMF: It is the certain proportion
[typically 25%] of member's quota in the IMF which can be accessed whenever
required with no obligation to pay immediately: $2 Bn
4. SDR [Special Drawing Rights] in the IMF.  $1.5 Bn

  India's Total Forex Reserves: $585 Billion (jan 2021) : 5th Position: India
should target Forex Reserves of $750 Billion to $1 Trillion.
 CHINA Topper $3000 Billion 

BoP Crisis, 1991:

The 1991 Indian economic crisis was an economic crisis in India that resulted from poor
economic policies and the resulting trade deficits. India's economic problems started worsening
in 1985 as the imports swelled, leaving the country in a twin deficit: the Indian trade balance was
in deficit at a time when the government was running on a huge fiscal deficit. By the end of
1990, in the run-up to the Gulf War, the dire situation meant that the Indian foreign exchange
reserves could have barely financed three weeks' worth of imports. Meanwhile, the government
came close to defaulting on its own financial obligations. By July that year, the low reserves had
led to a sharp depreciation of the rupee, which in turn exacerbated the twin deficit
problem.The Chandrasekhar government could not pass the budget in February 1991
after Moody downgraded India's bond ratings. The ratings further deteriorated due to the
unsuccessful passage of the fiscal budget. This made it impossible for the country to seek short
term loans and exacerbated the existing economic crisis. The World Bank and IMF also stopped
their assistance, leaving the government with no option except to mortgage the country's gold to
avoid defaulting on payments.

In an attempt to seek an economic bailout from the IMF, the Indian government airlifted its
national gold reserves.

Causes of BoP Crisis:

 External shocks:

 Gulf war: Iraq kuwait war in 1990- rise in crude oil prices.
 Soviet block breakup: During 1990, India was highly dependale at SU for its exports
 Very high foreign borrowing and improper fiscal discipline (fiscal deficit 8.4% of GDP in
1990-91)
 Political instability
 Rise in import bills of the govt.
 Low confidence of international business community
 inadequate foreign reserves

The crisis, in turn, paved the way for the liberalisation of the Indian economy, since one of the
conditions stipulated in the World Bank loan (structural reform), required India to open itself up
to participation from foreign entities in its industries, including its state-owned enterprises.
Also, it lead to devaluation of Rupee and bought closer to the market value as earlier it was
artificially overvalued.

> IMF conditions on India to provide loan through EFF to counter BoP crisis:

 Rupee devaluation by 22%

 Reduction in customs duty from custom peak duty of 130% to 30%.
 Reduction in govt. expenditure on subsidies etc.

1991: BoP Crisis (April-Sep) Million $

Current Account -6634

Capital Account +4808

Overall Balance -1826

RBI's Forex Reserve 728 : Insufficient

Exchange Rates:
 1. Fixed:

Historically Indian Rupee was linked to British Pound Sterling till 1948. In 1948,1
Rs.=0.30$=0.3*0.88=0.26 gms gold.
After Bretton Woods,1$ was pegged to 0.88 grams of gold (John Keynes was against
central role of $ & he wanted International Currency Bancor to be used & form
International  Clearing Union, ICU.
Due to cold war between USA & USSR & participation of USA in Vietnam War
which continued from 1955 to 1975,USA had to invest heavily in defense sector.So
war lead to inflation which raised gold price.In 1973 US Fed Reserve was paying 35$
for 1 ounce gold was market price was $40.So it was not feasible to stick to fixed
exchange rate system as it could lead to bankruptcy.So floating rate was adopted on
15 Aug 1973 by US President Nixon.

In 1992-93 India moved to floating currency regime & adopted Dual Exchange Rate
system in which one exchange rate is market driven & other is official through
LERMS i.e. Liberalised Exchange Rate Mechanism System in March 1993,but this
system is more prone to external shocks.

2. Floating: Completely market driven exchange rates.No intervention by the

central bank.But there is too much volatility.
3. Managed but floating: Intervention by RBI to mop up or inject $ in order to
reduce day-to-day volatility. India started following this system since 1992-93,
also known as dual currency regime.

There are 2 exchange rates of Rupee:

 Offical rate
 Market rate

 Manipulated Exchange Rate Regime: Undervaluation of Yuan by China to

help Exporters

NEER: Nominal Effective Exchange Rate: It is the weighted average of exchange

rates of 6 & 36  currencies of our major trading partners without inflation adjustment.
REER: NEER is adjusted with inflation.If REER>100 then currency is overvalued &
if it is <100 then currency is undervalued.
  Sterilisation: 

[]LRS: Liberalized Remittance Scheme 2004

 in each financial year, an Indian resident (incl. minor) is allowed to take out
upto $2,50,000 (or its equivalents in other currencies) from India, through an
AD
 Either Current Account transaction or Capital Account transaction or
combination of both
 Bank can NOT open foreign currency accounts for Residents under LRS, NOT
even in OBUs in India

To stop weakening of Rupee RBI can tight LRS to decrease $ demand.

Prohibited Activities under LRS:

 Lottery tickets
 trading in forex abroad
 investment in FCCBs issued by Indian firms
 investment in Non-Cooperative countries as identified by FATF

East Asian Crisis 1997

 Thailand,Malaysia,S Korea,Indonesia,Singapore etc.

Before Crisis:

 Full Capital Account Convertibility

 Deliberately kept currencies undervalued
 High Foreign Investment as a result of High Interest Rates
 Very High Forex Reserves
 Double Digit Growth Rate
 Fixed Foreign Exchange Rate

 the currency markets first failed in Thailand as the result of the government's
 decision to no longer peg the local currency,

Thailand's baht to the U.S. dollar (USD)

Quantitative Easing[QE]: 
It is an unconventional form of monetary easing used to stimulate an economy.
It is a expansionist monetary Policy to contain the -ve effects of some crisis like
Subprime or Sovereign Debt crisis.
It means buying of bad loans or bonds [Gilt edged] from the public in order to
increase money supply by the central banks during financial crisis.
It was done by US Fed Reserve during Global Financial Crisis of 2008 & also by ECB
(European Central Bank) during Sovereign Debt Crisis of many European
Countries[PIGS i.e. Portugal,Italy,Greece & Spain] in 2009.
US feds had decided that QE will be stopped when EITHER unemployment rate is less than
6.5% OR inflation is higher than 2.5%.

 ECB is formed by 19 countries of Eurozone out of 28 European Union

countries. Prz.=Mario Draghi & Headquarters at Frankfurt,Germany.
 As ECB is purchasing bonds so it will result in Increase in Bond Prices & Low
Bond yield.
 QE is done up to some increase in Inflation & decrease in unemployment rates.

Effects of QE in India:

1. Increase in FDI & FII in India.

2. Increase in $ Supply resulting into Stronger Rupee.
3. Good for Indian Importer & Bad for Indian Exporter.
4. Increase in HOT Money in Indian Markets which will have disastrous effects at
time of Tapering=means capital flight back to native country or other country
by FIIs.
5. In order to reap full benefits India should have sound economic policies & low
inflation.
6. Increase in excess foreign debt.

Other ways to increase money supply:

 1. Decrease Repo Rate: It  is done so that required money can be infused into the
economy through soft loans.But Banks may not transmit policy rate cuts as
they do not want to lend to subprime borrowers.They may invest in golds,G-
Sec & they also give loan to investment bankers & bigger corporates.

> Tapering: It is a mechanical term which stands for continuous reduction of width.
Continuous reduction in QE means less purchase of bonds by the central bank when
signs of growth start tinkling.
Effects on India:

1. Less bond purchase by ECB=Less $ supply=Rupee weakens.

2. FIIs pull out their money from Indian Market=capital flight=More $
demand=Rupee weak further.
3. Weaker Rupee=Bad for Imports=Increase in CAD
4. Expensive Imports=Expensive crude oil=Inflation
5. Weaker Rupee is good for exports but that does not mean it will result in higher
exports.Bcz, higher inflation will increase production costs making Indian
products less expensive in foreign markets.
6. So RBI should have higher Forex Reserves in order to avoid BoP crisis & for a
stable Forex Rate.Steps taken for this:

 Currency swaps with japan etc.

 FCNR swaps with banks.
 Formation of BRICS development bank.
 Reforms in FDI sector & Good policies to enhance exports.

FEMA: Foreign Exchange Management Act,1999:

> Effective from June 1,2000: Focus on management of foreign exchange
> It replaced FERA,1973
> It is regulated by Forex Department of RBI & Min of Finance

Machinery under FEMA:

 Enforcement Directorate ED: To investigate provisions of the Act & impose

penalty if required.
 Adjudicating Authorities: issues notice to persons who have broken rules of
FEMA
 Special Director (Appeals): Complaint against Adjudicating Authorities
 Appellate Tribunal: Complaint against Special Director (Appeals)
Foreign Exchange meaning by FEMA:

 Foreign Currency & All claims payable abroad.

Forex Market:

 24 Hour Market
 OTC
 Fluctuates every 4 seconds
 Global & High Liquid Market

Factors determining Forex:

 BoP: Surplus leads to a stronger currency

 Growth Rate: High growth leads to increase in imports which results into fall in
Rupee
 Interest Rates: High domestic Interest Rate attracts foreign capital in short term
but in long term higher interest rates slows the economy thus weakening the
currency.
 capital flows from lower yielding to higher yielding currencies.

Ready: Settlement takes place on same day

TOM: Next working day
Spot: Settlement after 2 working days
Forward: After Spot Date

Forex Dealing Room: Buy/Sell Forex, Manage Forex Assets & Liabilities & Manage
NOSTRO Accounts
Dealer maintains 2 positions:
Funds position= Receivable & Payable
Currency position=overbought & oversold positions
Back Office: Processing of deals,accounts etc.
Mid-Office: Risk Management & Compliance of Rules & Regulations

Risks in Forex:

 Operational 
 Exchange 
 Credit
  Liquidity 
 Gap/Interest Rate Risk: Gap in Forward sales & purchase: Banks have to fill
this gap by paying forward premium which is a function of interest rate.
 Market
 Legal
 Systemic 
 Country Risk: Insignificant Risk--- A1-A2-B1-B2-C1-C2-D--- Very High Risk
 Sovereign 

Authorized Dealers(AD): License by RBI to undertake foreign exchange

transactions.

 Authorized Persons Cat. 1: Banks,Financial Institutions & other financial

entities which are allowed to handle all types of forex transactions.
 Authorized Persons Cat. 2: FFMC=Full Fledged money changers:
sale/purchase of forex notes & Traveller's Cheques
 Authorized Persons Cat. 3: RMC=Restricted money changers: Only purchase
of forex notes & Traveller's Cheques

FEDAI: Foreign Exchange Dealer's Association of India 1958

All ADs are its members.

INFINET (Indian Financial Network): a secure communication backbone for banking

solutions.
SFMS: Structured Financial Messaging system: transfer of funds & messaging
domestically
SWIFT:  Society for Worldwide Interbank Financial Telecommunication: for
international messaging & payment orders through BKE i.e. Bilateral Key Exchange
CHIPS: Clearing House Interbank Payment system: payment system in USA
CHAPS:Clearing House Automated  Payment system:payment system in UK
Fedwire: Payment system operated by Fed Reserve 
Target: Trans-European Automated Real-time gross settlement Express transfer
system: EUROPE

Forward Exchange Contract:

Contract to sell/purchase Forex at specified exchange rate.

Inverted Duty Structure:

Inverted duty structure is a situation where import duty on finished goods is low
compared to the import duty on raw materials that are used in the production of such
finished goods. For example, suppose the tariff (import tax) on the import of tyres is
10% and the tariff on the imports of natural rubber which is used in the production of
tyres is 20%; this is a case of inverted duty structure.