Balance of Payments Flashcards
BoP
Overall statement of a country’s economic transactions with the rest of the world.
The responsibility of maintaining BOP lies with RBI.
BoPs in 1990s
India has inadequate reserves in 1990’s
Gulf crisis of 1990-91 led to a rise in crude prices India’s forex get depleted.
Downgrade by credit agencies + Outflow of NRI funds => Reserves declined to $0.9B
India had to pledge gold twice.
Reforms
Short Term (Stablizers):
Gold Pledged twice in 1991
Attracted Forex through India Development Bonds and Foreign Exchange Immunity Scheme
Devaluation
Long Term (Structural)
Current Convertibility
LPG - Foreign investors welcomed, Removal of Tariff and Non-tariff barriers
Relaxation of MRTP and FERA (Later FEMA)
Current Account Consist of
VISIBLE:
Goods- Export and import of merchandise/Goods
Services- Export and import of services
Income-
Profits: Income earned as profit, from the ownership of overseas assets by government individual or
companies.
Interest: Income earned as interest from the ownership of overseas assets
Dividend: Income earned as dividend from the ownership of overseas assets
Transfers-
Remittance: remittances from Indians abroad India receives highest remittances in world (-80 Billion)
Gifts:
Donations
INVISIBLE:
Services, Interest, Transfers (SIT)
Balance of Trade
Difference b/w import and export of goods
India’s Top 10 trading partner
10
Composition of exports
75% manufactured
25% manufactured
CAD
A current account deficit decreases the country’s net foreign assets. Surplus does the reverse.
Both government and private payments are included
Structural trade deficit:
Insufficiency of foreign currency earned through exports to meet the foreign currency needed for imports.
When CAD is good?
When it is getting financed by FDI
It is within Limits
Implication of large CAD
If not financed by capital inflows then forex will reduce
Country’s currency will start to depreciate
No forex for imports
No forex for debt servicing obligations
Ways to reduce CAD
Gold Monetisation Scheme: Tenor: 1 year to 15 year Min 30 gms, No max Can be redeemed in the form of gold coin/bars Profit exempted form capital gains tax
Sovereign Gold Bond: Limits: 4 kg Tenor: 8 years, but can exit from 5 year Interest 2.75% Amount equal to prevailing gold price the time of redemption
80:20 Scheme:
RBI mandated Min 20% of imported Gold must be exported back
RBI can give such mandate because of FEMA
Rationalization of fuel subsidy
Deregulation of petrol prices
Crack down on speculaions
Reforms related to ECB, FII, QFI etc
Capital account consist of
Foreign investment: FDI and FPI
NRI deposits
Loan and borrowings
External assistance and grants
FII
FIl is when foreign institutional investors invest in the shares of an Indian company, or in bonds offered by an Indian company.
Only institutional investors like Investment companies, Insurance funds etc. are allowed to invest in Indian stock market directly.
However, if foreign individuals want to invest in India’s markets, they have to get themselves registered as a sub account of an FIl.
QFI
QFI was introduced in 2002. A Qualified Foreign Investor can invest in India without sub-account.
The Qualified foreign investor (QFI) can be an individual, group or an association.
The OFI should be resident in a foreign country that is compliant with the standards of Financial Action Task Force (FATF)
