A

PROJECT REPORT
ON

Balance of Payment Forecasting

&
Its effects on Currency Movement
MASTERS OF MANAGEMENT STUDIES (MMS)
UNIVERSITY OF MUMBAI
SUBMITTED TO
MARATHA MANDIRS
BABASAHEB GAWDE INSTITUTE OF
MANAGEMENT STUDIES
MUMBAI CENTRAL

SUBMITTED BY

NEHA VYAS
Batch-2011, Roll no-117
(FINANCE)

DECLARATION
I, Neha Vyas, hereby declare that the project titled Balance of payment forecasting &
its effect on currency movement is an original work carried out by me, at Jain
Irrigation Systems ltd, Mumbai, India, as partial fulfilment of MMS degree of
Babasaheb Gawde Institute of Management Studies (BGIMS). The information
incorporated in this project is true and original to the best of my knowledge.

Place: MUMBAI

DATE: 23/07/2010

Signature

ACKNOWLEDGEMENT
With all my sincere gratitude, I would like to thank all those who have contributed in this
project & helped me in completing my task
I thank Mr. Deepak Mundra, who has been my mentor during this project report Mr.
Mundra is Sr. VP (Finance) for Jain Irrigation Systems ltd .
I am also grateful to Mr. Manish Shrivastava whose continuous guidance and supervision
enabled me to perform my best during the internship period,
I express my sincere thanks to our director Mr. Sunil Karve who gave me this valuable
opportunity to explore my skills.
Finally, yet importantly, I would like to express my heartfelt thanks to my beloved family for
their blessings, my friends for their help and wishes for the successful completion of this
project.

CONTENTS
Sr. No

Sub Sr. Topic

1
2
3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4
5
6
7
8
9
10
11

Page No.

Executive Summary
Objective of the Study
Literature Review- JISL Overview
BOP Key factors
Components of BOP
BOP Historical Overview
Relationship Between BOP & Currency Movement
What Drives Foreign Currency Movements.
Importance of BOP from the Viewpoint of Business.
Forex Risk Mitigation Techniques
Research Methodology
BOP Forecasting Model
Analysis of Data
Findings
Challenges in India to Maintain BOP Surplus
Projections of BOP by Banks
Limitations
Conclusions & Bibliography

5
6
7
9
10
16
22
24
27
29
36
38
42
50
52
53
56
57

1) Executive summary
The world in the twenty first century has become a dynamic place where nations and
countries do not have any boundaries. Globalization has been the key because of
which the whole world is now a global village. This seamlessness leads to all
economies in the world to carry out various transactions with each other, which bear
an economic value. All these transactions are exactly in the same spirit, they would
have been carried out by two residents or companies of the same country. The only
reason as to why these transactions are special is the difference of currency.

To appreciate these transactions, which involve foreign exchange, the government

should have a sound position in Forex reserves and it can be explicitly known even to
the government if and only if it maintains separate accounts for such transactions.
Hence every country in this world prepares a balance of payments.
The balance of payments transactions lead to currency movements, since the currency
movements are based on the demand and supply of that currency. So, when the
currency is in high demand it appreciates and vice versa happens when that currency
is in low demand.
In this project we will forecast the balance of payments of the financial year 20102011 by preparing a forecasting model, which is described in detail in the following
project.

2) Objectives of the Study are:

1) To prepare a balance of payment forecasting model.
2) To note the various changes which take place in the balance of payments due to
currency movements.
3) To forecast the balance of payment for FY 2010-11.
4) Finally to relate the above findings so as to get a comprehensive picture of where
the balance of payments of India is today and where is it headed.

3) Literature Review
Jain Irrigation Systems ltd (JISL) ---an overview
Jain Irrigation Systems (often known as Jain Irrigation, JISL, or simply Jains) is a
multinational organization based in Jalgaon, Maharashtra, India. JISL employs over
5,000 workers and manufactures a number of products, including drip and sprinkler
irrigation systems and components, PVC, PE piping systems, plastic sheeting,
greenhouses, bio-fertilizers, solar water-heating systems, and photovoltaic appliances.
JISL also processes dehydrated, concentrated, and frozen fruits and vegetables. It is

listed on the Bombay Stock Exchange and the National Stock Exchange. Jain
Irrigation has been named as one of the eight Indian companies expected to emerge as
challengers to the Worlds leading companies by Standard and Poor recently in May
2007.it is a public limited company. The company is mainly into agriculture industry,
solar energy industry, pipe industry and the irrigation industry.
Achievements

Pioneers of Micro Irrigation Systems in India.

The only manufacturer of complete drip irrigation systems in the world.

Globally second and the largest irrigation Company in India also a Total AgriService Provider.

One-Stop High-Tech agricultural shop.

The largest manufacturer of Tissue culture Banana Plants in India.

Largest pool of Agricultural Scientists, Engineers & Technicians in Private

Sector.

The largest manufacturer of Plastic Pipes in India.

Achievements Conti.

The largest manufacturer of PVC & PC sheets in India and globally amongst
first 5 Companies.

The only manufacturer producing widest range of Plastic Sheets (PC & PVC)
under one roof.

The largest manufacturer of Mango pulp, puree and concentrate.

Globally second largest manufacturer of dehydrated onion.

Corporate Rankings
Jain Irrigation Systems Ltd (JISL) in 2005 ranked 100th on the list of conglomerates
in Maharashtra.
JISL was listed 185th in the FE-500 ranking of 2005 by India Business Insight via
Thomson Dialog NewsEdge.
Standard & Poor's identifies Jain Irrigation Systems Ltd. among list of 300 worldbeaters.
The Crawford Reid Memorial Award instituted by the US-based Irrigation Association
was given to B.H. Jain, founder and chairman, for Significant Contribution to the
Irrigation Industry outside the United States.

3.1) Balance Of Payments- Key Factors.

Balance of payments is a Systematic record of all economic transactions during a
given period between residents of one country and residents (including the
governments) of other countries. It is an accounting record of all monetary transaction
of one country with others. The transactions are presented in the form of double-entry
bookkeeping. The transactions include export, import of goods, services, financial

capital & financial transfers. It basically comprises of sources of funds/ receipts and
allocation of funds/ payment. The BOP summarises international transactions for a
specific period, usually a year, and is prepared in a single currency, typically the
domestic currency for the country concerned. Sources of funds for a nation, such as
exports or the receipts of loans and investments, are recorded as positive or surplus
items. Uses of funds, such as for imports or to invest in foreign countries, are recorded
as a negative or deficit item.
When all components of the BOP sheet are included it must balance that is, it must
sum to zero there can be no overall surplus or deficit. For example, if a country is
importing more than it exports, its trade balance will be in deficit, but the shortfall
will have to be counter balanced in other ways such as by funds earned from its
foreign investments, by running down reserves or by receiving loans from other
countries.
While the overall BOP sheet will always balance when all types of payments are
included, imbalances are possible on individual elements of the BOP, such as the
current account.

3.2) Components of the balance of payments:

As it is evident, balance of payment is a collection of accounts of all such eligible
transactions, which shall have bearing on the Forex position of the economy. The
BOP is conventionally grouped into three main accounts with subdivisions in each.
The three major accounts in BoP are:

a) The Current Account

b) The Capital Account
c) The Reserve Account
a) The Current Account
Current account includes merchandise and invisibles account. All the trade
transactions relating to movable goods are covered under merchandise account and
trade in services, transactions of investment income and gifts are included in the
invisibles account. The following is the detailed description of every line item in the
current account.

i) Merchandise Account
1) Exports on F.O.B basis F.O.B stand for free on board. It means that the price
quoted by the exporter does not include the cost of sea/air transportation but includes
the cost of loading on board. After putting the goods on board the ownership/liability

10

of the goods passes on from the exporter to the importer. This is important in
determining who is responsible for the damage or loss of goods during transit.
2) Imports on C.I.F basis- C.I.F refer to cost insurance freight. It is a term under
which the seller pays the code of shipping the goods to the port of destination and of
insuring goods to this point. In a C.I.F contract the seller sends the documents giving
the title of the goods to the buyer.
3) Balance of trade- it is the difference for exports and imports, which is either a
surplus or a deficit. Balance of trade =Net earnings on export net earnings on
imports. It gives us an idea about the foreign currency inflow and outflow. Greater
exports indicate greater Forex inflow and greater imports mean greater Forex outflow.

ii) Invisibles Account

1) Services- Trade in services, transactions of investment income and gifts.the
following sub- classification is observed by RBI

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(i) Travel- Indians buying tickets of foreign airlines, availing of their travel services is
inflow in this account. While foreigners buy ticket of airlines in India, is an outflow.
(ii) Transportation- transportation of goods. When Indians avail foreign shipping or
cargo services, it is outflow of money and when foreigners avail of Indian cargo
services, it is inflow.
(iii) Insurance- Insurance cover purchased by Indians from foreign insurers is outflow
and reverse is inflow.
(IV) Miscellaneous- all export-import of other services such as teaching, consulting,
art performances, BPO,KPO, Transcriptions etc.
(v)Government not included elsewhere- Foreign governments pay Government of
India for maintenance of their embassy and vice-versa. This is recorded in
government not classified elsewhere.

2) Official Transfers: It comprises net transfer payment between governments of the

reporting country and the rest of the world. Revenue contributions of Government of
India to international institutions, Foreign Aid received etc are included in this
account.

12

3) Private Transfers: It comprises net transfer payments between private persons and
nonofficial organizations of the reporting country and the rest of the world that carry
no provisions for repayments. It also Includes workers' remittances; transfers by
migrants; gifts, dowries, and inheritances; and alimony and other support remittances.
4) Investment Income- income derived on investments abroad. Income derived by
Indians on their assets, loans, stock investments abroad in the form of interest,
dividends and profits.
5) Compensation of employees- It Comprises remittances of income by migrants who
have come to an economy to stay for a year or more and who are employed by their
new economy, where they are considered to be residents.

b) The Capital Account

The capital account can be classified by instrument (debt or equity) & maturity i.e.
(short or long term). The main components of capital account are foreign investment,
loan, banking capital.

13

Foreign investment comprising FDI & portfolio investment represents non-debt

liabilities whereas loans (external assistance, external commercial borrowings & trade
credit) & banking capital including non resident Indian (NRI) deposits are debt
liabilities.
1) Foreign Direct Investment-it refers to long term capital investment such as the
purchase or construction of machinery, buildings or even whole manufacturing plants.
If foreigners are investing in a country, that is an inbound flow and counts as a surplus
item on the capital account. If a nations citizens are investing in a foreign country,
that's an outbound flow that will count as a deficit. After the initial investment, any
yearly profits not re-invested will flow in the opposite direction, but will be recorded
in the current account rather than as capita.
2) Portfolio investments- it refers to the purchase of shares and bonds. Its sometimes
grouped together with "other" as short term investment. The capital account entry is
for any international buying and selling of the portfolio assets.

3) Private Sector Capital Flows- This consists of loans received by private entities
(other than banks)in India from non-residents, investment by foreigners in shares of
Indian Companies, repayment of loans to residents by non-residents, repatriation of
Indian investments abroad.

14

4) Other investment includes capital flows into bank accounts or provided as loans.
Large short term flows between accounts in different nations are commonly seen
when the market is able to take advantage of fluctuations in interest rates and / or the
exchange rate between currencies.
5) Banking Capital: This covers changes in assets and liabilities of commercial banks.
This includes government banks, private banks as well as co-operative banks that are
authorized to deal in foreign exchange.
c) The Reserve Account- The reserve account is operated by a nation's central bank,
and can be a source of large capital flows to counteract those originating from the
market. Inbound capital flows, especially when combined with a current account
surplus, can cause a rise in value (appreciation) of a nations currency - while
outbound flows can cause a fall in value (depreciation). If a government (or if its
authorised to operate independently in this area, the bank itself) doesn't consider the
market driven change to its currency value to be in the nations best interests', the
bank can intervene.

3.3) The Balance of Payment historical overview

The balance of payments situation has been undergoing cyclic changes since
1951-52. The first five year plan was the only period where we did not experience

15

balance of payments problem. During this period, the trade deficit was financed by
net receipts from the invisibles and transfers. The current account deficit, therefore, is
very small.
Since the beginning of the second five year plan, India has experienced
balance of payments problems of varying intensity. By the end of 1980, the situation
reaches crisis point. The trade deficit stood at 3.2% of GDP; the current account
deficit increased to 2.2 percent. It was necessary to finance the deficit by resorting
more and more to commercial borrowing.
The Crisis: 1990-92
The gulf crisis of 1990 led to an unprecedented crisis in the balance of
payments. The balance of payments crisis reached its peak in the summer of 1991
when the foreign currency reserves had fallen to almost $1 billion, inflation had risen
to an annual rate of 17 percent, industrial production was falling and overall economic
growth had declined to 1.1 percent in 1991-92. The payments crisis became evident in
1990-91 when the oil prices increased due to the Gulf War. This resulted in worsening
of current accounts deficit which increased to 3.2% of GDP in 1990-91.

There was also deterioration in the invisible account because of lower remittances and
higher interest payments. Foreign exchange reserves started to decline from
September 1990. They declined from Rs.5480 crores ($3.1 billion) in August 1990 to

16

Rs. 1666 crores (896 million) in January 1991. During this period the Government
had to take recourse to IMF to overcome the balance of payments difficulties. The
main factor responsible for the sharp fall in reserves was the sharp rise in the imports
of POL. However, the payments crisis of 1990-91 was not simply due to deterioration
on the trade account, it was accompanied by other adverse developments on the
capital account reflecting the loss at home, coupled governments ability to manage the
situation. Political uncertainty at home, coupled with rising inflation and widening
fiscal deficits, led to a loss of international confidence.
Indias recourse to the commercial borrowings totally dried up as the credit
rating agencies downgraded India. Simultaneously, there began an outflow of nonresident Indian deposits. In addition there were serious difficulties in the rolling over
of short term credit, which was roughly of the order of $5 billion. While current
account deficit of the order of $8 billion was easily financed in 1988-89, a deficit of
$9.7 billion in 1990-91 became almost impossible to finance.
By June 1991, the balance of payments crisis had become overwhelmingly a
crisis of confidence, i.e. a crisis of confidence in the governments ability to manage
the balance of payments. A default on payments had become a serious possibility in
June 1991 for the first time in the Indian history.

A default is essentially a failure to repay debts, but its ramifications are never
confined to debt. A default in payments inevitably leads to a breakdown in credit
availability and normal payments arrangements. Suppliers become reluctant to sell

17

goods and services and insist on advance payments through banks of their own
country. This leads to severe trade disruptions which in turn forces severe and
prolonged import compression and results in shortages, industrial dislocation, and
severe unemployment and high inflation.
The new government of Mr. P. V. Narshima Rao which assumed office in June
1991 acted swiftly and took measures which relied on a combination of
macroeconomic stabilization and structural reforms in industrial and trade policies.
The exchange rate was also adjusted downwards. As a result of these policy reforms
and successful mobilization of exceptional financing, the balance of payments
position slowly stabilized during 1991-92. The increase in foreign exchange reserves
combined with stabilization and structural reforms restored international confidence.
With the sharp decline in the absolute level of imports, 1991-92 ended with a current
account deficit of less than one percent of GDP.

Liberalization Strengthens Indias Balance Of Payments

18

India has emerged stronger in its external payments position at the end of the
first decade of liberalization and structural reforms that have transformed the
countrys standing in the world economy. The 1991 balance of payments crisis was
turned into an opportunity by Government to re-set the directions of the economy to
become outward-oriented and move closer to integration with the world economy.
The reforms covered trade and industrial policies, the exchange rate, tax and
foreign investment policies and the banking system. The launching of a truly
liberalized trade regime, with a two-step devaluation of the rupee in 1991 leading later
to market-determined exchange rate, and the ushering in of a conducive climate for
foreign investment inflows, have had a dramatic impact on the countrys external
transactions.
The effect of liberalization on the balance of payment can be compared:

Trade and Investment Flows

19

The early 1990s saw a surge in exports, a significant rise in foreign direct
investment and other capital flows including portfolio capital from foreign
institutional investors and a substantial increase in private transfers under the
category of invisibles in balance of payments account. In ten years, 1991-2001, over
37 billion dollars of foreign investment flowed. Of these 18 billion dollars was direct
investment, i.e., an average of 2.2 billion dollars a year.
The private transfers, which averaged two to three billion dollars in the 1980s
mainly the remittances of Indians employed abroad grew to a level of 10-12 billion
dollars in the latter half of 1990s.
The export growth momentum resulting from the gradual opening of the economy
and the exchange rate reforms including the convertibility of the rupee for current
account transactions in August 1994 triggering the surge in invisible receipts, are the
two major factors which helped contain the current account deficit in BOP to 1 to 1.5
per cent of GDP between 1991 and 2001.

20

Balance of Payment Surplus

A low current account deficit is a healthy indicator of the countrys balance of
payment position. With the strong capital flows (net) from 1993-94 onwards, India
could easily finance the current account deficit and add sizeable amounts to the
foreign exchange reserves. NRI deposits with the banking system in India have also
been on the rise from 13 billion dollars in 1991-92 to 23.8 billion dollars by March
2001.
The balance of payments has recorded an overall surplus in most of the years and
consecutively for five years from 1996-97. Indias foreign exchange reserves, which
were barely one billion dollars in the pre-crisis year, have now reached a level of 40
billion dollars (other than gold and SDR), the average annual addition being 4.5
billion dollars. This order of reserves is equivalent to eight to nine months of imports.
The external sector strength has to be derived essentially from exports. And, after a
few years of slowdown, there has been a revival with growth rates moving upto 11
and 20 per cent in the two years ended March 2001. But no less important is the
management of the external sector as a whole including exchange rate stability.
India has successfully withstood the fall-out effects of the Asian financial turmoil in
1997, the economic sanctions imposed by USA and other countries following the
nuclear tests in May 1998 and the sharp rise in international oil prices since the
closing months of 1999. In spite of a heavy outgo of over 10 billion dollars from
imports of higher priced oil, Indias trade deficit has been contained within
manageable limits.

21

3.4) The Relation Between Balance Of Payments And Currency Movements.

As we know the balance of payment is a record of foreign currency payments and
receipts of a country. Foreign Currency inflow and outflow takes place due to these
BoP transactions. The flow and the direction of foreign currency leads to increase or
decrease in the demand and supply of that currency. The increase or decrease in
demand and supply of that currency will therefore result into the appreciation or
depreciation of the home currency, for eg if our exports increase by $ 2.4 million then
we will have an inflow of USD 2.4 million. This particular situation will lead to an
increased supply of USD in India, this will make the USD depreciate in terms of the
Rupee and will lead to Rupee appreciation.

22

Supply

and

Demand

of

currency

determines

its

exchange

rate.

People supply currency in order to purchase imports or to facilitate capital exports

(domestic installation into foreign markets) and people demand currency in order to
purchase domestic exports, or to facilitate capital imports (foreign installation into
domestic markets)

Basically, supply of any currency increases as that currency becomes valued more
(because high valued currencies can buy more imports, and translate into larger
foreign investments), while demand for any currency shrinks as that currency

23

appreciates (because this makes exports from that country more expensive, and capital
inflows less effective).
Supply of currency will increase if
-there is heightened demand for imports
-there is heightened domestic demand for investment in foreign markets
-Domestic prices are higher than foreign prices
Demand for currency will increase if
-There is a heightened demand for exports
-There is a heightened demand for investment in domestic markets
-Foreign prices are higher than domestic prices for surpluses, exports are higher,
imports are low, and demand for domestic currency is high supply of it is low, and
thus the currency appreciations. For deficits, exports are lower, imports are high,
demand for domestic currency is low, supply of it is high, and thus the currency
depreciates. In this way each and every transaction in foreign currency leads to the
upward or downward currency movement. Hence we can establish a relation between
the transactions of balance of payments and the foreign currency movement

3.5) What Drives Foreign Currency Movement?

24

Foreign currency market is largely demand and supply driven. So if the demand for
one currency goes up, its value appreciates or if a currency is in abundant supply, its
value will decline. A currencys strength is mainly determined and driven by the
strength of the economy of the country that it represents. For example, the US
Dollars value is mainly dependant on the strength of the US economy and any major
changes in it will lead to changes in the foreign currency market too. However, it does
not mean that even a small change in the fundamentals of an economy will result in a
change in the value of its foreign currency.
Lets try to identify the various factors that impact foreign currency movements and to
what extent.
Changes in the Interest Rate Policy of a Country
Interest rate policy of any country is a key driver of its currency exchange rate. If a
country raises its interest rates, it is likely to attract more foreign investors, thus
resulting in the strengthening of its currency. For example, if the interest rates in the
Euro zone increase, the investors in the US and other countries may sell their local
holdings and instead invest in euro bonds. This will lead to an increase in the value of
the euro and a decline in the value of the US Dollar and the currencies of other
countries.

25

Changes in the Gold Prices

An increase or decrease in the prices of gold has an instant impact on the currencies of
countries which are the major producers and exporters of gold. Say if the prices of
gold goes up, the currencies of Australia and Canada who are the leading exporters
and producers of gold will strengthen. Similarly, the currencies of gold importing
countries will weaken if gold prices rise.
Now some countries use gold as a standard for monetary exchange. This means that a
unit of a countrys currency can be exchanged for a specific weight of gold. Investors
can analyze the change in gold prices and then decide to exchange currencies to take
advantage of the price change to maximize their profits.
Changes in the Prices of Crude Oil
Currencies of oil dependant nations like the US, Japan and India are highly dependent
on the price of the crude oil. Say if the price of crude oil increases, the imports of
these nations will surge, leading to increased outflows and thus have a negative
impact on the value of their currency.
Political Conditions of a Country
The stability or instability of the government in a country can also lead to changes in
the value of a currency. A stable government is an indicator of consistency in
economic policies and continued movement towards growth. In comparison, an
unstable government indicates uncertainty related to economic policies and thus may
have a negative impact on the countrys currency value.

26

Central Bank or Government Intervention

Sometimes, a countrys central bank also participates in the Forex market in a bid to
stabilize prices. A central bank may flood the Forex market with their countrys
currency in a bid to lower its price. Or, they may buy a significant amount of their
own currency and thus try to boost its price.
Many a times, it is not these factors but merely speculation about these factors that
leads to changes in the value of the currency of a particular country. Although foreign
currency markets move in response to changes in any of the above factors, the impact
is short term. The enormous size and the massive volumes witnessed in the foreign
exchange market restrict the impact of any change in any of the above factors.

27

3.6) Importance of balance of payments from the viewpoint of business managers

Business managers and investors need BOP data to anticipate changes in host country
economic policies that might be driven by BOP events. From the perspective of
business managers and investors the following are the three specific signals that a
countrys BOP data can provide.

The bop is an important indicator of pressure on a countrys foreign exchange

rate.
The bop helps to forecast a countrys market potential, especially in the short

run
Changes in a countrys bop may signal the imposition or removal of controls
over payments of dividend and interest, license fees royalty fees or other cash
disbursements to foreign firms or investors.

28

A company in todays world exists in a very competitive environment, and to have an

edge over competitors foreign exchange business is very essential. A moderate portion
of funds of a company comes from its treasury operations, since there is a lot of
money involved in treasury operations; the degree of risk is also high. Since a
companys cash flows are uncertain and there is a huge amount of risk in managing
those funds, a company does hedging to nullify or manage currency risk. By hedging
its currency risk a company can export when the Rupee has depreciated and import
when Rupee has appreciated, which sometimes proves favourable for companies.
To hedge their risk companies enter into various derivative market instruments. So,
when the investors feel that the currency will move in a favourable direction they
enter into derivative markets and book forward contracts etc. In this way it comes to
our notice that the Bop factors which affect the currency movement also affect the
micro environment in which the company dwells.

29

3.7) FOREX RISK MITIGATION TECHNIQUES USED BY COMPANIES

Mitigating foreign exchange risk means to reduce the effect of currency translation or
currency effect on a financial instrument to know the mitigation techniques let us first
see what the business needs for foreign currency are.
Business Needs for Foreign Currency
-Accounts Payable and Accounts Receivable
Companies purchase raw materials or component parts for the manufacturing of
goods. When the transaction is conducted in a currency other than the local currency,
risk increases. In order to control the cost of goods sold and reduce the risk, using
some form of hedge is necessary.
Companies that buy and sell in a foreign currency will often use a netting effect. The
company will maintain a foreign currency account to deposit funds from sales and to
withdraw funds to pay for purchases. The repatriation of funds generally results in the
form of profits which are converted and transferred to the home office periodically,
thus taking advantage of favorable market conditions.
Interest rates vary widely from country to country. It often makes sense, depending on
the cash position of the company, to take an equal and opposite foreign exchange
exposure position to complete a transaction at maturity. The company could take out a
loan in the amount of a receivable in the foreign currency, convert it to their local
currency and use the proceeds from their receivable to pay off their loan.

30

The company may also buy the foreign currency and place it on deposit with a bank
to earn interest and use it to pay off the payable at maturity. This action will enable the
company to fix the exchange rate and take advantage of favorable investment
opportunities.
A buyer and seller may agree contractually to share the exposure risk. They can
establish different parameters based on market conditions to control the risk.
Parameters can include payment of goods in the local currency, the splitting of the
payment in both the buyers and sellers currency, or the inclusion of a price
adjustment clause if the exchange rate changes substantially.
The most common means to control exposure risk is to engage in a forward contract
either in the form of a purchase or sale of a currency. The forward contract establishes
a fixed price to be paid at maturity on the date the contract is executed. The general
requirement is a small security deposit to secure the completion of the trade at
maturity. Thus the company fixes the price without using capital until the maturity of
the contract. The fixing of the price of the foreign exchange contract also allows the
company to make a decision today whether to proceed or not based on current rates.
The company can then price the product for sale based on the actual cost of the
components.

31

-Balance Sheet Hedging

Foreign currency options protect against adverse foreign exchange fluctuations while
benefiting from a positive movement in the exchange rate. The trader is provided with
the right but not the obligation to buy (call option) or sell (put option) a specific
amount of foreign currency at a fixed price within a set period. Protection is provided.
If the rates are unfavorable to the trader, he will just exercise the option; should the
rates be favorable to the trader, then there is no need to exercise the option. Because
of its advantages, this process for a right to buy or sell can be expensive. It is
generally used for large denominations. Contingent obligations resulting from long
contract negotiations could make this an attractive means of controlling exposure risk.
-Acquisition Activity
Acquisitions take time to conclude and are often in large denominations. The
evaluation of an acquisition is difficult enough without the worry of foreign exchange
rate fluctuations. Options provide a good hedge against rate fluctuations during the
negotiation process.

32

Measuring Foreign Exchange Exposure

-Transaction Exposure
Transactions in the form of purchase contracts or agreements denominated in a
foreign currency but not yet settled create transaction exposure. The fluctuation of the
currency will have an impact on the value until the transaction is completed. The
value of an unsettled export receivable or an import payable is just one example.
There are multiple hedging techniques to help the investor minimize his risk,
including:

forward contracts

futures contracts

use of a money market hedge

contractual risk sharing

pricing adjustments based on forward rates

foreign currency accounts

foreign currency options

Translation Exposure
The revaluation of all foreign-denominated assets and liabilities often referred to as
transfer pricing is usually considered paper gains or losses. The conversion of an
asset by selling it and converting the proceeds to the local currency would create a
realized gain or loss. This form of exposure is created when financial statements are

33

prepared and converted to the local currency of the owner or investor. This form of
exposure is considered an indication of potential gains or losses.
Economic Exposure
The evaluation of foreign governments from an economic standpoint determines
whether a translation exposure could be realized. The projected stability of a country,
both politically and economically, impacts future cash flows and can adversely impact
the profitability of an organization. Strategic planning for operations must include
economic exposure.
Common Instruments to Offset Risk
Spot
Spot trades are priced and executed on the spot based on the current market rate and
are paid for immediately. Spot contracts are generally done verbally and considered
binding. When executing a trade, an offer price is provided; if accepted, the contract is
considered done. Delivery of the currency is generally two days forward; the twodays time is used for the bank to receive the currency it purchased and deliver the
currency to the beneficiary as provided by the buyer.
Forwards
Forward contracts are priced by combining the current spot price with the forward
points. Forward points are based on the differential in interest rates of the two
countries. The discount or premium points, once determined, are combined with the
spot rate to create the forward rate. Some currencies are not traded openly, but there is

34

a non-deliverable currency market. By hedging with a non-deliverable forward, a

purchaser can protect against rate fluctuations rather than settling a transaction at
maturity using the exchange rate that is posted on that date. Settlement would be in
the local currency to provide additional local funds to settle the transaction.
Swaps
Spot contracts are settled immediately while a forward contract has a fixed maturity
and must be settled at maturity. Capital can be tied up when the need to deliver the
currency has been delayed. Swaps provide an opportunity to exchange the foreign
currency for the local currency for a fixed period of time and swap it back when it
is needed.
Options
Options provide protection for large denominations by taking advantage of rate
improvements while protecting against the negative impact of a rate change.
Alternatives Countertrade forms can and are often used when a currency cannot be
traded. Bartering is most commonly used, but other forms are counter purchase,
advance purchase, buy backs and bilateral arrangements.
The national stock exchange and MCX stock exchange will now be able to offer
options in the dollar rupee pair after seeking capital market regulator sebis approval
the two exchanges now offer futures trading in four currency pairs dollar, euro, yen
and pound verses the rupee.

35

The advantage of options over futures is that the former limits the downside to the
extent of the premium paid to take exposure while the upside is unlimited. A futures
contract on the other hand exposes a trader to huge profits and losses. An option gives
the buyer (of a put or call) the right but not the obligation to exercise the contract. In a
futures contract, a traders position is marked to market at the end of a trading day.

36

4) RESEARCH METHODOLOGY
Sources of Data:
1. Primary data was collected through interviews with the senior economists of Yes
bank about the forecasting methods used for balance of payment forecasting by them.
2. Secondary data sources comprised of Economic Times newspaper, periodicals
from ICICI, CITI bank etc, last six years balance of payments from the RBI website,
book on Forex risk management by A.V.Rajwade as well as other websites from the
internet.
The methodology used
1) The quarterly bop from year 2004-5 to 2009-10 were clubbed together to get a
detailed view of the trends followed by every line item in each quarter.
2) Every items percentage to GDP of India in that respective year was taken out to
know the approximate share of each item in the GDP of India.
3) Also the quarter wise percentage growth of the first quarter of a year to the first
quarter of the previous year has been taken out.
4) The trends in the percentage growth and the percentage gdp have been observed
and by keeping this in mind the BOP FY11 has been prepared.

37

Forecasting Models
The following are the models for forecasting where a critical factor is assumed to be
constant and on behalf of this assumption we can predict the other elements of the
model.

Models for forecastingA) Naive model next year will be like last year the assumption here is that
there is no change in the BOP model.
b) The economy will continue to expand the assumption here is that the rate
of growth of the item will remain either constant or will increase.
c) Economic behaviour links aspects of BOP for e.g. Export and import
volumes are related to output and price developments in India and abroad.

38

5) THE BOP FORECASTING MODEL

To create a forecasting model at first we need to accumulate historical data. Hence I
have collected balance of payments for the last six years, both year on year and
quarterly data. Our objective here is to forecast each and every line item of the bop
current account. To learn the methodology behind the forecasting I met miss Bhavana
Mahajan, Senior economist with Yes Bank.
As per her guidance I have tried to forecast the
current account and to some extent the capital account. Since we are forecasting each
and every line item of the current account we have bifurcated the current account as
follows:Exports- we have divided Indias exports commodity wise and country wise.
Imports- similarly we have taken imports as commodity wise and country wise. We
have also classified imports as oil imports and non-oil imports.
Invisibles-we have divided the invisibles into software services and non-software
services, wherein software services showed changes in trends due to seasonality and
non-software services were sentiment driven.
The bop forecasting model created is based on
a) Seasonality

39

b) Trends
Hypothesis
The hypothesis for our model of forecasting is that the Indian economy will continue
to expand.
The following charts show the bifurcations of exports and imports country-wise and
commodity wise, these charts have been used for forecasting the FY2010-11 exports
and imports.

40

41

42

43

Source-official website of department of commerce.

6) Analysis of Data
The following is the balance of payment for the last 6 years and the percentage
growth of each line item to the gdp of India and quarter wise growth.
FY 2004-05
Major Items of India's
Balance of Payments

Billio
n$

ITEM
1. Exports

Q1

Q2

H1

Q3

17.8

3.28

18.8
2.6
9
28.5
4.0
6

-5.1
7.38

-9.6
1.3

36.6
5.2
3
51.5
7.3
4
14.7
2.1

20.8
2.9
7
32.6
4.6
5
11.7
1.6

as a % of GDP
2. Imports
as a % of GDP

2.54
23

3. Trade Balance (1-2)

as a % of GDP

44

9
MTH

Q4

H2

FY04

57.4

24.5

45.3

81.9

8.2
84.1

3.5
34.6
4.9
4
10.1
1.4

6.47
67.2

11.7
118.7

9.59

16.93

-21.8
3.11

-36.5
-5.22

1.2
-26.4
-3.78

4. Invisibles Net
as a % of GDP
5.
Current
Balance (3+4 )
as a % of GDP
6.
Capital
Balance*

7
6.1
8.7
4

1
14.6
2.0
9

7
6.2
8.9
7

2.99

4
10.6
1.5
2

-0.1

4.83

-3.4
4.9
9

-5.4
7.7
3
12.0
3
1.7
1

-5.5

0.5

-7.91

0.0
75

4.1

2.8

6.9

2.72

12.1
1.7
2

0.59

0.4

0.7
0.08
0.03
6

1.2
0.4

0.48
4.5

2.38
4.98

0.59
3.8

1.07
8.3

2.97
8.78

0.29

1.9
0.48
0.32
6

0.36

0.686

1.2

1.56

1.886

1.07
2.5
0.78
1.7

0.54
-0.3
0.46
0.18

1.61
2.2
1.24
1.88

1.79
1.59

3.4
3.79

2.1
2.68

3.89
4.27

5.5
6.47

0.05
0.77

-1.19
2.65

0.24
0.82

0.29
1.59

-0.95
3.47

0.97

3.9

2.93

2.57

5.5

0.80
8

7.57

0.6

6.97

6.59

13.56

12.6

3.37
8
19.1
9

%
Gr

H1

Q3
26.
4
3.2
5
38.

8.5
1.22
Account

3.3

0.0
1

Account

as a % of GDP
i)
Foreign
Direct
Investment
ii) Portfolio Investment
iii) External Assistance
iv) External Commercial
Borrowings
v) Banking Capital
vi) Non-resident Deposits
vii) Short Term Credit
viii)
Other
Capital
(including
errors
&
omissions)
7. Changes in Reserves #
(- indicates Inc & +
indicates Dec)

20.8

18.93

16.8
10.4
9

31.4

-4.9
7.65
5
24.1
3

-5

3.43

4.43

12.58

7.645
31.03

6.308
26.16

Major Items of India's Balance of Payments

ITEM

Q1

1. Exports

24.1
2.9
8
37.7

as a % of GDP
2. Imports

%
Gr
35
64

Q2
24
2.9
7
38.

45

27
35

48.1
5.9
5
76.3

%
Gr
26
17

Q4
30.5
3.7
7
42.3

%
Gr
24
22

H2
56.
9
7.0
3
80.

FY0
5
105
13
157

4.6
6

as a % of GDP
3. Trade Balance (1-2)
as a % of GDP
4. Invisibles Net
as a % of GDP
5.
Current
Account
Balance (3+4 )
as a % of GDP
6.
Capital
Balance*

Account

as a % of GDP
i)
Foreign
Direct
Investment
ii)
Portfolio
Investment
iii) External Assistance
iv) External
Commercial
Borrowings
v) Banking Capital
vi)
Non-resident
Deposits
vii) Short Term Credit
viii) Other Capital
(including errors &
omissions)
7.
Changes
in
Reserves #
(- indicates Inc & +
indicates Dec)

13.6
1.6
7
10.0
4
1.2
4
-3.5
0.4
3

162.
9

17
204.
8

4.8
0.5
9

14.9

1.1

0.2

67
110
0
488.
8

1.09

1.4

0.97

0.78

-69

6
4.7
7
14.
6
1.8
9.5
8
1.1
8
5.0
4
0.6
2
10.
3
1.2
7
11.
9
4.4
0.1
8
1.7
5
1.9
9
0.3
4

-0.1
0.15
0.3

-1.2

-86
108.
5

1.1
2

-133

0.5
6
5.2
5

-83

FY2005-06

46

2
9.4
3
51.
9

56

44

28.2

4.7
11.
8

3.4
8
19.6
2
2.4
2

1.4
6
8.0
1
0.9
8

8.54

-3.8

1.0
7
259

15.1
1.8
6

16

1.4
5
27

-29

14.5
1.7
9

36

2.7

423

0.3
4
107

51.7

2.9
22.
5
2.7
8

6.38

1.1

9.64

0.1
3

1.2

9.5
6
1.1
8

42.1
5.2

191

244

3.4

16.4

-40

4.3

14

12.4

31

0.56

-54

338

3.02

41

161

-0.4

116

7
1.0
3
1.1
8
1.3
7

595

2.5
5

-2

1.67
0.02
3

0.26

0.4
5

117

0.24

-70

0.7
3
0.2
1

4.05

4.6
7

170

13.2

4.6

8.5
3

8.5

0.38

7.8
18.
2
114
6

2.84

929

11.7

19.4

-13

13

374

0.8

5
9.9
4
23.
5

10.4
1.2
9

838
17.
7

897
7

0.4
7
0.8
4
0.1
1.4

5.2
2

5.37

2.77

2.7
0.4
7
-4.2
0.9
7
0.8
8

0.24
0.97

0.7
5

153
1

102

24.7
3.04

1.41
1.66
1.4
2.79
1.7
0.47
4.48

FY 2006-07

Major Items of India's

Balance of Payments
ITEM
1. Exports
as a % of gdp
2. Imports
as a % of gdp
3. Trade Balance (1-2)
as a % of gdp
4. Invisibles Net
as a % of gdp
5.
Current
Account
Balance (3+4 )
as a % of gdp
6.
Capital
Balance*
as a % of gdp
i)
Foreign
Investment
ii)
Investment

Account

Direct
Portfolio

iii) External Assistance

iv)
External
Commercial
Borrowings
v) Banking Capital

US $ billion
%
Q1
Gr
29.
6
22.8
3.2
4
**
46.
6
23
5.0
9
**
16.
9
24.5
1.8
5
**
12.
3
23
1.3
5
**

Q
2

%
Gr
35.
9

11
1.
2

15
**

H1
62.
3
6.8
1
95.
1
10.
4
32.
7
3.5
8
23.
3
2.5
5

33
3.
6
49
5.
3
16
1.
7

**
25.
5
**
8.4
**

%
Gr

Q
4

%
Gr

H
2

FY0
6

16

36
3.
9

16.7

129

**

66
7.
3

49
5.
3

14.7

96

191

**

11

20.9

30
3.
2

62.3

54.4

54

31
3.
4
1.
5

**

0.
2

Q3
30.
6
3.3
5
47.
5
5.1
9
16.
8
1.8
4
14
1.5
3

75.8

**
24
**
42
**

**

-4.5
0.4
9

28

-5

-4

-9.3

-2.7

-27

**

0.
5

**

1.0
2

0.3

10.
9
1.1
9

127.
8

**

18
1.9
7

10.
2
1.1
2

**
131
5

1.7
0.5
2

44

-79

4.2

23

-89

2.
1
0.
3

3.5
5.0
7

226
549

1.
2
-2

**

-154

7.
1
0.
8
2.
5

47

-31

-99

1.5
8
23.
3

-97
103

4.7
3.2
7

-97

13
1.
4
17
1.
9
4.
2
0.
5

9.5
**
18
**

54

**

16
1.
8

2.5

81

3.5

29.8

0.6

32.7

3.9
-3.3

193
242

1.
8
0.
7
6.
6
2.
2

**

-57
32.6
120.
7
-630

26
2.
9
4.
5
5.
3
1.
3
11
1.

14.1

6.82

5.96
-7.8
1.18
44.4
4.86
8.73
6.88
24.6
15.2
2.17

1
vi)
Non-resident
Deposits
vii) Short Term Credit
viii)
Other
Capital
(including
errors
&
omissions)
7.
Changes
in
Reserves #
(- indicates Inc & +
indicates Dec)

1.2

124
0

0.
8

-83

1.9
9

1.2

40

0.
6

0.4

-376

1.
5

-91

1.9

-0.3

142

1.
6

2.
7

-85

4.2

3.3

-2

-57

-8.5

-7.5

839
260

2
20

1.5
-6.3

388.
8
411.
5

-62
714
3
737
54.6

1.
8

3.79

1.
3

3.2

5.
3
28

9.53
36.4

FY 2007-08

Major Items of
India's Balance of
Payments
ITEM
1. Exports
as a % of GDP
2. Imports
as a % of GDP
3. Trade Balance
(1-2)
as a % of GDP
4. Invisibles Net
as a % of GDP

US $ billion
%
Q1
Gr
35.
7
20
3.0
2
**
56.
4
21
4.7
8
**
20.
7
22
1.7
5
**
14.
4
16
1.2
2
**

Q2

%
Gr

37.5

14.9

3.18

**

H1
73.
2
6.2
1

58

19.5

114

Q3
42.
2
3.5
9
67.
3

4.92

**

20.4

29

1.73

**

15.5

40.7

1.31

**

9.7
41.
1
3.4
8
29.
9
2.5
3

5.7
25.
1
2.1
2
19.
9
1.6
9

48

%
Gr

Q4

%
Gr

H2

FY0
7
158.
2
13.4
2
248.
3
21.0
5

37.8

42.8

19.9

85

**

3.62

**

41.7

66.6

37

**

5.64

**

48.7

-23.7

84.8

7.21
133.
9
11.3
5
48.7
9

**

2.01

**

4.14

7.62

41.7

22.7

32.8

42.6

72.5

**

1.92

**

3.62

6.15

89.9

5.
Account
(3+4 )

Current
Balance

as a % of GDP
6. Capital Account
Balance*
as a % of GDP
i) Foreign Direct
Investment
ii)
Portfolio
Investment
iii)
External
Assistance
iv)
External
Commercial
Borrowings
v)
Capital

Banking

vi)
Non-resident
Deposits
vii) Short Term
Credit
viii) Other Capital
(including errors
&
omissions)
7.
Changes
Reserves #

in

59.8

34.1

381

**

2.89

**

11.
2
0.9
5
51.
6
4.3
7

53.9
151
5
947.
8

2.1

-15

4.7

10.8
7

408

0.45

46

18.
3
0.6
5

96

3.5

186

10.
4

-109

6.18

438

-136

0.36

-54

5.7
1
0.0
8

332.
6

3.5

134

5.3

4.1
3

-153

7.09

161

75.5

29.2

118
8

6.2
9
40.
4

2.9
26.
7

-6.3
0.5
3
17.
5
1.4
8

37.9

2.6
7.4
0.2
6.9
0.4
7
0.4
4
1.8

-0.8
11.
2

-4.9

0.41

(- indicates Inc &

+ indicates Dec)

FY 2008-09
US $ billion

49

-124

6.14

17.3

60.6

0.52
57.8
3

1.47
109.
4

4.9

6.3

**
211.
7

8.34

9.27
13.0
4

-3.7

-302

11.1

29.3
7

0.5

316
10.7

0.8

11.8

1.3

1.95

6.2

56

4.8

-27

11

21.4

1.0
6

-131

5.8

157

-169
140
6

1.1

75.9

6.86
851.
9

6.3

289

10.4
3

15.7
3

-12

5.09

150

7.99

14.2
8

256

-24.9

22

51.6

-92

-5.1
0.4
3
31.
8
2.6
9
2.0
4
14.
8

853

84

-1.04

209.
8

0.08
26.0
3

**

2.2

-20

12.5
7
-852

ITEM

Q1

%
Gr

1. Exports

49.1

37

4.23
80.5

**
42.
6

6.94

Q2

%
Gr

48.9
4.2
2

30

50.9

**

87.6
7.5
5

31.4

51.
8

as a % of GDP

2.7

4. Invisibles Net

22.4

**
55.
5

as a % of GDP
5.
Current
Account Balance
(3+4 )

1.93

**

26.1
2.2
5

9.01

43

as a % of GDP
6.
Capital
Account
Balance*

0.77

as a % of GDP
i) Foreign Direct
Investment

0.97

as a % of GDP
2. Imports
as a % of GDP
3. Trade Balance
(1-2)

ii)
Portfolio
Investment
iii)
External
Assistance
iv)
External
Commercial
Borrowings
v)
Capital

11.2

2.3

-0.5
-2.2

-40
-80

8.9
-4.2
0.35
1.4
1.8
0.8

**

98
8.4
5
168.
1
1.4
5

38.6

88.9

-70

3.3
3

**

6.0
4

**

Q3
37.
2
3.2
1
71.
9

**

48.5
4.1
8

6.2
34.
7
2.9
9
21.
6
1.8
6

12.5

153

21.5

1.0
7

**

7.7

-77

%
Gr
-1
**
6.8
**
38

Q4
39.
8
3.4
3
54.
4
4.6
9
14.
5

%
Gr

H2

FY08
175
15.0
9
294.
4
12.3
4

38.6

77
6.6
4
12
6
10.
9
49.
2

**
14.9

4.2
5
40.
9

10.2
9

7.68

-7
**
-18
**

-119

**

1.2
5
19.
3
1.6
6

-13

154.
7

4.7

-556

1.8
5

1.1
2

**

0.4

**

3.5
8.3
3
0.7
1

18.9

-115

4.4

-117

9.2

9.7

1.6
4

-4.8
0.4
1

0.8

0.84

5.5

159.
7

14.4

0.4

-78

3.1

-49

3.5

17.9

-1.3

-112

-5.5

-5.8

-139

2.6

-27

8.4

-13.9

0.5

14

0.85

0.9

75.5

0.7

-7.5

1.6

2.45

1.8

-48

3.2

3.8

37.8

1.1

-77

8.1

1.8

69.7

3.6

-4.9

-568

5.4

-193

4.9
10.
3

0.25

29.8

1.05

1.04

-222

0.77

-78

3.07

-3.9

-197

-1.3
4.7

-119
-16

-1.8
2.5

5.1
17.
8

74
-167

68

0.6
7
23
7
15
6
45.
6
78.
9
49
9
28
2
32.
8

Banking

vi) Non-resident
Deposits
vii) Short Term
Credit
viii)
Other
Capital
(including errors
&
omissions)
7. Changes in
Reserves #

**
35.
6

H1

50

**
8

**

0.3
8

2.1
5.4

95.9
-87

3.1
4
9.3

1.1
0.3

-77
98.7

6.2
17.
5

89.4

-29.8
1.14

-6.7
4.19
-6.23

4.4
20

(- indicates Inc &

+ indicates Dec)

Major Items of India's

Balance of Payments
ITEM
1. Exports
as a % of GDP
2. Imports
as a % of GDP
3. Trade Balance (12)
as a % of GDP
4. Invisibles Net
as a % of GDP
5. Current Account
Balance (3+4 )
as a % of GDP
6. Capital Account
Balance*
as a % of GDP
i)
Foreign
Direct
Investment
ii)
Investment
iii)
Assistance

US $ billion
%
Q1
Gr

Q2

38.7
3.4
5

42.3
3.7
6

64.7
5.7
6
25.9
2.3
1
20.1
1.7
9
-5.8
0.5
1
5.9
0.5
2
6.8

-21
**
19.5
**
-17
**
-9.9
**
35.6
**
-47
**
23.7

74.5
6.6
3
32.2
2.8
6
19.5
1.7
4
12.6
1.1
2
22.0
4
1.9
6
7.6

Portfolio
External

8.2
0.08
4

-296

9.6

-76

0.48

51

%
Gr
-14
**
4.9
**
-17
**
-25
**
0.9
**
18
3
**
36.
8
83
9
5.9

H1
81
7.2
1
139.
2
12.
39
58.1
5.1
7
39.6
3.5
3
18.4
1.6
3
27.9
4
2.4
8

Q3
44.
6
3.6
1
75.
3
6.0
9
30.
7
2.4
18.
6
1.5
1
-12
9.7
13.
7
1.1

%
Gr
13.
5
**
-4.9
**
16.
7

Q4
52.
4
4.2
3
83.
9

**

-32

115.
7

62.2

**

-4.9

-4

37.1

**

-374

-25
8.6
5

-440
**

28.8
2.3
2

3.2

0.47

7.1

21.5
32.2
1.96
4

0.9

-13

**
183

FY0
9

6.7

**

-25

1.0
5
15.
1
1.2
2

31.5

H2
97
7.8
4
159.
2
12.
79

2.5
18.
5
1.4
9

**

%
Gr

**
54

14.4

3.9

**
36.
8

17.8
0.56
4

5.6

839

8.8

-427

14.4

0.6

-5.9

0.8

2.9

1.4

178
15.
05
298.
4
25.
18
120.
3
10.
07
76.7
6.5
3
43.6
10.
28
56.7
4
4.8

iv)
External
Commercial
Borrowings
v) Banking Capital
vi)
Non-resident
Deposits
vii) Short Term Credit
viii) Other Capital
(including errors &
omissions)
7.
Changes
in
Reserves #
(- indicates Inc & +
indicates Dec)

-0.3

-124

1.18

-36

-5.1

-375

3.37

1.8
3.08

123

1.04

80
30
4

-229

0.84

8.8

-1.6

222.
7

0.12

-0.1

94.8

-9.4

-91
29
9

0.88
1.73

1.6

-36

0.1

-91

1.7

2.58

1.9

80

0.4

-107

2.3

0.57

2.84
2.24

0.6

304

0.6

-72

1.2

4.04

3.2

8.8

-191

8.2

5.96

1.72

-2.4

-91

0.9

-178

-3.3

5.02

-9.5

1.7

299

2.1

600

-3.8

13.3

FY 2009-10

BOP Trends From 2004-05 to 2009-10

1) Exports- exports items have seen a considerable and constant increase from
FY2004 to FY2009.it has increased at a steady pace of 81.9, 105, 128.6, 158.2, 175,
178 million $ from 2004 to 2009
2) Imports- the imports as well have gradually and constantly increased from
FY2004-2009.the imports have increased from 118.7, 156.8, 191.1, 248.3, 294.4, and
298.4. The percentage increase in imports is more than the percentage increase in
exports .hence in all the 6 years the balance of payments has shown a balance of trade
deficit.

52

3) Trade balance- the trade deficit too has been increasing constantly because of the
increase in both imports and exports.
4) Invisibles Net- the net invisibles have shown an increase from 2004-05 to 2008-09
but in the year 2009-10 it decreased by 12.7 million $.
5) Current account balance The current account balance has shown a deficit from
year 2004-05 to 2009-10. The deficit increased majorly in the year 2009-10 because
of the reduction in the surplus of net invisibles in that year.
6) Capital Account Balance- the current account balance from FY2004-05 to FY
2009-10 is 31.03, 24.66, 44.4, 109.43, 9.7, and 56.74.it can be seen that in the year
2008-09 the capital account balance was mere 9.7 million $.

The forecasted balance of payment FY11

Major Items of India's Balance
of Payments
ITEM

FY 10-11
Q1
Q2

Q3

Q4

1. Exports
as a % of GDP
2. Imports
as a % of GDP

56.4
4.21
89.4
6.67

50.28
3.75
84.4
6.3

52.9

53.7
4.01
90.5
6.75

3. Trade Balance (1-2)

-33

-36.8

-34.12

as a % of GDP
4. Invisibles Net
as a % of GDP

2.46
23.2
1.73

2.74
24.5
1.89

-2.54
20.9
1.55

53

YOY
213.2
8

3.95
86.4

350.7

6.45
-33.5
2.49
20.1
1.49

137.4
2

88.7

5. Current Account Balance

(3+4 )
as a % of GDP
6. Capital Account Balance*
as a % of GDP
i) Foreign Direct Investment
ii) Portfolio Investment
iii) External Assistance
iv)
External
Commercial
Borrowings
v) Banking Capital
vi) Non-resident Deposits
vii) Short Term Credit
viii) Other Capital (including
errors
&
omissions)
7. overall balance
7. Changes in Reserves #
(- indicates Inc & + indicates
Dec)

48.72

-9.8
-0.73
15.95
2.3
5.8
8.3
0.43

-12.3
-0.91
23.83
3.3
7.6
10.3
0.36

-13.22
-0.98
16.29
2.18
3.6
5.8
0.7

-13.4
-0.99
15.4
2.3
3.4
6.1
0.6

0.21
0.23
0.84
1.12

1.32
2.64
0.34
1.16

1.3
1.5
0.8
3.6

0.5
0.7
0.4
4.1

3.33
5.07
2.38
9.98

-0.98
6.15
-6.15

0.11
11.53
-11.53

-1.01
3.07
-3.07

-0.4

-2.28
22.75
-22.75

-2

71.47
10.08
20.4
30.5
2.09

7) FINDINGS
-The Forecast
1) Indias export grew by 36.1% and 35.1% In April and May 2010 respectively. Iron
ore exports for April-May have more than doubled over a year earlier, while oil
exports have benefited from India's growing refining capacity and rising external

54

demand. Gems and jewellery is the largest contributor (around 16%) to the countrys
total export basket, and was one of the worst hit during the slowdown. India is
targeting a 15% growth in exports in the current fiscal. India's industrial output rose
17.6% in April from a year earlier, the strongest since December 2009.
Hence the expected export for FY10-11 will be around $ 213.28 billion, and the
expected imports will be around $ 350.7 billion.
2) The trade deficit has widened at $ 137 billion.
3) In invisibles, business services declined but software stayed strong, invisibles will
grow marginally as we assume a 15% increase of software services.

-The Forecast
4) Current account deficit is likely to soften on steady software exports and strong
workers remittances in FY11. We expect strong capital inflows to India during
2HFY11 to strengthen rupee further to 43 per US dollar by Mar11. In the short run,

55

however, rupee is likely to face downward pressure due to the ongoing uncertainty in
the international markets.
5) Portfolio investment and short term credit inflows have increased considerably in
the Q4 FY10 and are expected to continue in FY 10-11.
6) The overall balance is expected to be around $ 22.75 billion.

8) Challenges for India to maintain the Bop surplus

Inflation Control
To increase Indias exports and reduce imports
To increase foreign exchange reserve majorly through current account items.

56

In the current scenario India receives greater foreign exchange through capital

account items; this situation is particularly critical and should be taken care of.
To take measures to make the partially convertible rupee fully convertible
i.e. to take measures to include capital account convertibility (CAC).

The Positive Side

Indias GDP growth

Investment opportunities as growing in the Indian market.
Measures taken by the government to revive the infrastructure of India.

9) Projections of balance of payments FY 2010-11 by banks

ICICI Bank:-

57

On the whole India's FY10 BoP reflects a significant improvement over the previous
year and strengthens our expectation of a robust BoP in FY11, primarily driven by
healthy portfolio investments and increase in ECBs. But a potential risk to our view
is a widening trade deficit, with the first two months of FY11 already showing a rising
trend. Also a weak global economic recovery could weigh on invisibles in this fiscal.
While NASSCOM expects software exports to rise by 13-15% in FY11 to USD 57 bn,
developments in the global economy remain the key drivers of revenue on account of
invisibles. We expect improvements in the global financial markets and investor risk
sentiment to augur well for the capital flows over the year that will help absorb the
larger trade deficit. On the whole we expect FY11 to record a Bop surplus of USD 25
billion, an improvement over FY10. This helps cement our Rupee appreciation view
for this fiscal.

STANDARD CHARTERED

58

Trade deficit:-Although FY11 exports are expected to rise by 15%, versus

13% growth in imports, we expect the trade deficit to widen by about USD
12bn to c.USD 129bn.

Limited gains in invisibles to keep current account deficit wide: A 4%

decline in remittances flows in H2-FY10 from H1, and expectations of
depressed wages in the developed world (North America accounts for about
38% of remittances flows), do not paint an optimistic picture. While rising
crude oil prices should help (c.27% of remittances originate from the Gulf), a
10% improvement in remittances in FY11 and a 15% pick-up in services
exports should leave the current account deficit unchanged at a historical high
of USD 38bn. Risks to this projection are for a wider deficit, as the
probability of relatively strong growth in India remains high.

Better debt flows to boost capital flows: The consistent improvement in

capital flows in FY11 over FY10 is encouraging. Unlike in H1-FY10, when
debt flows were negligible, H2 saw strong inflows of USD 11.5bn as shortterm credit gained momentum. Overseas borrowing (external commercial

59

borrowings, or ECBs) also improved, but there was a similar level of outflows
due to a large amount of maturities. Debt flows should increase in FY11 as
global liquidity remains in surplus and interest rate arbitrage increases. While
huge ECB-related outflows are also expected in FY11 (USD 12.9bn versus
USD 12.2n in FY10), conducive global conditions and higher inflows from
the governments 3G spectrum sale should boost inflows. we forecast a 22%
increase in capital flows to USD 66bn, as Indias relatively strong growth
prospects should keep demand for foreign capital high. Regulations on capital
flows in other economies could also redirect some flows to India.

Persistent trade deficit likely to cap Bop surplus at USD 27.6bn, versus
our initial estimate of USD 41.3bn. Invisibles should fund 70% of the trade
deficit in FY11, and stronger capital flows should boost the Bop surplus.
However, as the trade deficit is likely to be wider than our initial expectation,
we revise down our forecast for the FY11 Bop surplus to USD 27.6bn

10) Limitations

The data available for each line item could not be bifurcated further
considering the time limit for the given project

60

The current account items are highly volatile and hence only the foreign direct
investment and the portfolio management items were predicted since the

monthly and the daily data was available on the

Since forecasting is a type of prediction and the predicted bop may or may not
come to be true as the future is unpredictable, hence I cannot guarantee that

my prediction will come true.

While predicting we have assumed that no world financial crisis like the
recession of the year 2008 will take place. This may or may not be true.

11) CONCLUSION
The forecasted balance of payments shows higher inflows from exports, software
services, portfolio investments and foreign direct investments. The condition of
countries foreign exchange inflows will be favourable as the first half of the year

61

passes by. The interest rate in the country will remain lucrative enough to attract
foreign investors and hence foreign currency. The world was currently facing the
Greek debt crisis because of which there was a lot of uncertainty in the international
markets. India has not been much affected by this crisis and hence still remains a
growing economy for investors. The gdp of India is predicted to grow by 8.5 % from
the last year.
Strong capital inflows during the second half of FY11 will strengthen rupee
further to 43 per US dollar by Mar11. In the short run, however, rupee is likely to
face downward pressure due to the ongoing uncertainty in the international markets.
Keeping in mind the growth in Indian economy and the current scenario I expect my
hypothesis to be in line

BIBLIOGRAPHY
1) www.jains.com

62

2) www.rbi.org.in
3) www.commerce.nic.in
4) press information bureau (government of India)
5) The world fact book
6) Forex Risk Management A.V.Rajwade

63