Tapan Mehta (PRN No.

10020741057)
Balance of Payment

ME Assignment

A record of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa. Current account Current account

Merchandise

Invisibles

Exports

Imports

Services

Income

Private Transfer

Travel

Transportation Insurance

GNIE

Miscellaneous

GNIE-Govt. Not included elsewhere Reduction in exports due to global economic slowdown and lagged decrease in imports widened the trade deficit in early 08-09. However, the below mentioned factors reduced the effect of widening trade deficit on the current account balance to an extent thereby reducing the current account deficit. o Robust software services exports and remittances from overseas Indians increased the net invisible surplus. o Larger decline in imports relative to imports. In the first quarter of 09-10, CAD increased as compared to the same period previous year due to the decrease in net invisible surplus.

Capital Account Capital Account

Foreign Investments

Foreign Direct Port folio Investment Investment (Non Debt liabilities)

Others (Leads and lags in exports, Special Drawing Rights (SDR) allocation, Funds held abroad, advances Received, and other capital not included elsewhere)

Loan and Banking Capital Non Resident Indian Deposits (Debt liabilities)
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Tapan Mehta (PRN No. 10020741057)

ME Assignment

There was a massive decline in net capital flows in 08-09 as compared to 07-08. The reasons could be attributed to the global liquidity squeeze, increased risk aversion leading to low investments, withdrawal of funds from equity markets. Besides, there was also net outflows under portfolio investments which included FIIs, American depository receipts, global depository receipts, banking capital including NRI deposits and short term credit. However, this effect was contained to an extent by high FDI inflows. The net capital inflow improved during the first quarter of 09-10 which was followed by further improvement in subsequent quarters. This can be attributed to the below mentioned reasons o Buoyant net inward FDI and a stable net outward FDI resulting into higher inward FDI. o The purchases made by FIIs in the Indian Capital Market resulted into large net inflows in Port folio investment mainly comprising of FIIs, ADRs/GDRs. o Reduced net external commercial borrowings & net banking capital, Higher net inflows in NRI deposits, reduced short term trade credit and lower other capital outflows

Foreign exchange Reserves Foreign exchange Reserves

Foreign Currency Assets

Gold

SDR

Reserve Tranche Position in the IMF

In 08-09, there was a decline in the foreign reserves of India. The major reasons were o Global crisis and strengthening of US dollar vis-a-vis other currencies o Widening of current account deficit o Valuation loss arising out of major currencies against the US dollar. During the first quarter of 09-10, the values of foreign exchange reserves. The major reasons were o Valuation gain as the US dollar depreciated against other currencies o Higher capital inflows in the form of portfolio investment o Receipt of SDR 3,082 million under general allocation and SDR 214.6 million under special allocation from the IMF.

Exchange Rate RBI intervenes in the foreign exchange market in order to achieve the below mentioned goals o Reduce excess volatility o Prevent emergence of destabilizing speculative activities o Maintaining adequate levels of foreign exchange reserves o Developing an orderly foreign exchange market. In 08-09, Rupee depreciated against all major currencies except pound sterling due to deceleration in capital flows and widened trade deficit. In 09-10, Rupee strengthened on the back of following factors o Increased FII inflows o Increased FDI inflows o Increased NRI deposits o Better macro-economic performance of the Indian economy o Weakening of US dollar in international market o Expectation of political stability on the back of general election
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Balance of Payment

Tapan Mehta (PRN No. 10020741057)

ME Assignment

o Depreciating dollar because of declining safe haven flows to the US, large scale quantitative easing and change in market sentiment against US dollar Considering Nominal effective exchange rate (NEER) indices which is the indicator of external competitiveness of the country over a period time, the rupee appreciation was 3.2 % against 6 currency trade weighted average NEER during 09-10. The average six currency trade weighted Real effective exchange rate (REER) increased to 104.94 in November 09 from 98.58 in April 09.

The G-20 The group of 20 finance ministers and central bank governors called G 20 is taking up the cause of global stability, policy coordination and growth at global level on the back of the financial crisis. Various summits were held for the same. The key points of the meetings are as below. London Summit, April 2, 2009: o Objectives: Restore growth, confidence and jobs Repair the financial system to restore lending Strengthen financial regulation to rebuild trust Fund and reform the international financial institution Reject Protectionism Build inclusive & sustainable recovery o Outcomes: Agreement to treble resources available to IMF to $750 billion Pittsburgh Summit, September 24-25, 2009: o Objectives: To adopt a set of policies, regulations and reforms to meet the needs of 21st century global economy o Outcomes: - Agreement to Ensure proper regulatory system for banks and other financial firms Take new steps to increase access to food, fuel and finance among the worlds poorest countries Clamp down illicit outflows Phase out and rationalize fossil fuel subsidies 5% shift in the IMF quota to underrepresented countries St Andrews Meeting (Scotland), November 7, 2009: o Objectives: To decide on the policy support for the recovery from crisis which was uneven o Outcome: -Agreement To maintain support for the uneven recovery until it is assured since there was still high unemployment prevalent.

Achievements of G-20 o Commitment from the member countries to higher standards of transparency and exchange of information on tax matters to combat abuses of the financial system and illicit activities. o Commitment to implement the unprecedented and most coordinated expansionary macroeconomic policy including fiscal expansion, establishment of FSB, strengthening IFIs

Balance of Payment

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Tapan Mehta (PRN No. 10020741057)

External Debt

ME Assignment

External debt increased in end-march 2009 to $224.59 billion compared to previous years debt of $224.42 billion If further increased in the first half of 2009-2010 to $242.8 billion out of which 82.5% was long term debt and short term debt was 17.5 %. The valuation effect arising due to depreciation of the US dollar against major international currencies contributed maximum to the total increase in external debt i.e US $ 8.1 billion in total increase of US $ 18.2 The major contributors to the external debt in Sept 09 were o Commercial borrowing (27.5%) o Trade related credits (16.2%) o Increase in NRI deposits (18.9%) o Multilateral Debt (17.4%) o Bilateral Debt (9.1%) o Export credits (6.3%) o SDR allocation (2.6%) o Rupee debt (0.7%) Governmental Debt - $65.7 billion Nongovernmental debt - $177.1 billion Debt sustainability indicator that is the ratio of Foreign exchange reserves improved from 112.1 % in March 09 to 115.8% in September 09. India was the fifth most indebted country in 2007

Challenges Direct implications of the risks of double dip recession in advanced countries Inflows of foreign funds due to low interest rates in advanced countries could lead to overheating of the economy.

Balance of Payment

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