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International Financial Management Pgapte
International Financial Management Pgapte
P G Apte
What is the Balance of Payments?
• The Balance of Payments of a country is a systematic, double-entry
accounting record of all economic transactions during a given
period of time between the residents of the country and foreign
residents
• Some Simple Rules of Thumb
– All transactions which lead to an immediate or prospective
payment from the Rest of the World (ROW) to the country should
be recorded as credit entries. The payments themselves, actual or
prospective, should be recorded as the offsetting debit entries.
– All transactions which lead to an immediate or prospective
payment to the ROW from the country should be recorded as
debit entries. The payments themselves, actual or prospective,
should be recorded as the offsetting credit entries.
–A transaction which results in an increase in demand
for or reduction in supply of foreign exchange is a debit
entry while a transaction which results in an increase in
the supply of or reduction in demand for foreign
exchange is a credit entry.
During 2008-09 so far capital flows have remained volatile. Net capital
flows during 2008-09 so far were lower than those in the corresponding
10, 2008) in contrast to net FII inflows (US $ 18.9 billion) during the
On the other hand, net FDI flows into India were placed higher at US $
The funds raised through issuances of ADRs/GDRs abroad were at
August 2007).
August 2008 mainly due to inflows under the rupee deposit accounts
With net capital flows being higher than the current account deficit,
Capital Flows (US $ billion)
Source: RBI
INDIA’S FOREIGN EXCHANGE RESERVES
Why BOP Statistics Are Important
• BOP statement contains useful information for
financial decision makers.
• In the short run, BOP deficits or surpluses may
have an immediate impact on the exchange rate
• When exchange rates are market determined,
BOP figures indicate excess demand or supply
for the currency and the possible impact on the
exchange rate
• May signal a policy shift on the part of the
monetary authorities of the country, unilaterally
or in concert with its trading partners
BOP and the Macroeconomy
• Persistent imbalance- exchange rate changes and/or
policy responses.
• Reserve loss, not sterilized, leads to monetary
contraction, higher interest rates, economic slowdown
• Reserve gain leads to monetary expansion, lower
interest rates, economic upturn
• No intervention leads to exchange rate depreciation
or appreciation – quantity impacts on exports, imports
thereby other sectors
• Excessive imbalance (-), may lead to crises/panics.