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INTERNATIONAL FINANCE CAPITAL ACCOUNT

Presented by :Samik Acharya Mayuresh Amle Sagar Ghule Sudeep Kulkarni Tushar Pande Sumeet Sonawane

Balance of Payments Account


Receipts Exports of good Export of services Interest , profit and dividend received Unilateral receipts Foreign investment Short term borrowing Medium and long term borrowing xxx xxx xxx Payment Imports of good Trade account balance Import of services Interest , profit and dividend paid Unilateral payment Investment abroad Short term lending Medium and long tern lending Capital account balance Statistical discrepancy xxx xxx xxx

xxx

xxx

Current account balance xxx xxx xxx xxx xxx xxx

BOP accounts
Current account The difference between a nation's total exports of goods, services and transfers, and its total imports of them. Current account balance calculations exclude transactions in financial assets and liabilities. Capital account A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public and private international investments flowing in and out of a country. Reserve account Foreign reserve with any country held by the Central bank of the country.

Sources of International Capital Movement


Short term (Less than 1 year duration):

Short term capital sources are demand deposits , bills, overdrafts, commercial and financial paper and acceptances, loans & commercial book credits etc.
Long term (More than 1 year duration):

Establishment/Acquisition of income generating assets in a foreign country over which investing firm has control. a) Foreign Direct investment b) Portfolio investment c) Assistance from Government and Institution.

Foreign Direct Investment


Refers to an investment in a foreign country where investing party retains control over investment. Reasons for FDI Advantage of organizational abilities of MNCs Low cost resources in host country Overcome trade barriers restricting imports Transfer of technology to host country Gain from weak currencies of host countries Cumulative Amount of FDI flows into India from April 2000 to January 2012 has been US$ 243.05 billion
(Source: DIPP, RBI)

Portfolio Capital
Refers to purchase of shares & debentures of business concerns of a country by foreigners Simply investments- no control over management Large amounts of portfolio investments flow between the worlds stock markets and other financial centers, transferring large amounts of hot money across national frontiers depending on investor confidence Exchange rate risks involved in a big way Cumulative Amount of FIIs into India from 2000 to 2012 has been approx. US$ 117.57 billion
(Source: Indiainfoline)

Government/Institutional Loans
Governments of advanced countries give loans to finance projects in a developing countries. International FIs like World Bank, ADB also give financial assistance to developing countries. For example, the total amount of loans disbursed by the WB to India stands at US$ 14.915 Billion as on 31/5/2012. (World Bank Website)

Foreign Aid
May be received as loans and grantsLoans qualify as aid only to the extent that they bear a concessional rate of interest and have longer maturity periods than commercial loans

DETERMINANTS OF INTERNATIONAL CAPITAL FLOWS


PULL FACTORS

PUSH FACTORS

PULL FACTORS
Openness of domestic financial markets Liberisation of FDI Credible structure Macroeconomic policies Stabilization policies Ability of economy to absorb shocks of changes in International terms of trade

PUSH FACTORS
Lower foreign interest rate Recession abroad Herd mentality in international capital market

Interest rate

Interest rate Integration of financial and other market

Interest rate Integration of financial and other market Growing pool of international financial capital

Interest rate Integration of financial and other market Growing pool of international financial capital Liberisation of capital account transactions and move towards flexible exchange rate regime US $ 7.1 billion in 1990-91 to US $ 134.0 billion in 2010-11.

Interest rate Integration of financial and other market Growing pool of international financial capital Liberisation of capital account transactions and move towards flexible exchange rate regime Stability

Government policies

Government policies Social and economic overheads Infrastructure facilities Labour policies Market potential

Government policies Social and economic overheads Credit rating

Government policies Social and economic overheads Credit rating Speculation

Government policies Social and economic overheads Credit rating Speculation Profitability

Foreign capital flow to developing economies


1945 World war II ended 1945 - 1970 :- International capital flows were confined to industrialized economies 1970- Oil price shock 1970 -1980 :- Flows to developing nations mainly in the form of syndicated bank lending. Debt levels rose at a CAGR of 24% 1982 :- Latin America debt crisis burst the bubble 1983-1989:- Declination of capital flows; FDI started picking up 1994:-FDI flows surpassed Debt flows

ROLE OF FOREIGN CAPITAL

Supplements domestic capital FOREIGN formation


CAPITAL

ECONOMIC CYCLE IN A DEVELOPING ECONOMY

Accelerates economic development


GDP (Cr)
5000000 4303654 3790063 3635496 4000000 3275670 2877706 3000000 2538171 2261415 2097726 1925017 2000000 1000000 0 2001 2002 2003 2004 2005 2006 2007 2008

FDI (Cr.)

R R 9 CO 8 . =0 N

IO 2009 T EL A

120000 98664 100000 85700 70630 80000 60000 40000 19361 14932 12117 17138 24613 12645 20000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009

Balance Of Payment

Transfer of technology
11 % growth rate for Telecom

15 % growth rate estimated for Pharma post 49% FDI

Role of foreign capital (Contd.)


Realization of external economies Reduction in costs Stimulation of domestic investments Income and employment Improves trade balance

Drawbacks Of Foreign Capital


Inefficient allocation of resources and production distortions Destabilise the economies Highly volatile in nature

Reduces the effectiveness of monetary policy High cost of foreign capital Inappropriate technology

Capital inflows (in US$ Mn)

Foreign Reserves (in US$ Mn)

Capital Management in India


Capital account liberalization began after 1991 following a severe BoP crisis High Level Committee on Balance of Payments (Chairman: C. Rangarajan, 1991) The two reports on Capital Account Convertibility (Chairman: S.S.Tarapore, 1997 and 2006).

What is Capital Account Convertibility?


CAC refers to freedom to convert local financial assets into foreign financial assets and vice versa. It is associated with changes of ownership in foreign/domestic financial assets and liabilities and emboldens the creation and liquidation of claims on,by rest of the world.CAC can be and is co existent with restrictions other than on external payments

Objectives of FCAC
To facilitate higher economic growth through higher investment by minimising cost of both equity and debt capital To improve the efficiency of financial sector through greater competition ,thereby minimising intermediation costs To provide opportunities for diversification of investments by residents

Review of Capital account liberalisation since 1997


Preconditions

Concomitants for a move to FCAC


Fiscal consolidation Strengthening of Banking System External Sector Indicators Current Account Defecit Adequacy of Reserves

Timing And Sequencing of Measures for FCAC

Thank You