Balance of payments

(BOP)
The balance of payments of a country is a
systematic record of all economic transactions
between the residents of a country and the rest of
the world.
It presents a classified record of all
receipts on account of goods exported, services
rendered and capital received by residents and
payments made by them on account of goods
imported and services received and capital
transferred to non-residents or foreigners.

Bank of India

Reserve

BOP on Current Account

BOP on Capital Account
Balancing Item - an amount that accounts
for any statistical errors

BOP = Current Account Capital Account +/

- Balancing Item

BOP on Current Account

shows the net amount a country is earning if it is in
surplus, or spending if it is in deficit.
Includes payments that do not give rise to future
claims
Components:
Visible trade relating to imports and exports of
goods
Invisible trade items viz. receipts and payments for
such as shipping, banking, insurance, travel etc.
Unilateral transfers such as donations

BOP on Capital Account

records the net change in ownership of foreign assets.
Implications of current transactions for the countrys
international financial position.
Surplus or deficit of current account are reflected in the
capital account
It includes the reserve account (the international
operations of a nation's central bank), along with loans
and investments between the country and the rest of
world
FER (Foreign Exchange Reserves) an index of current
strengths or weaknesses of a countrys international
options

Indicators of Strengths of a
Nation
Steady accretion to reserves
Moderate levels of current account deficit (CAD)
Changing composition of Capital inflows
Flexibility in exchange rates
Sustainable external debt levels

Current Account Deficit

a country's total imports of goods, services and
transfers is greater than the country's total export
of goods, services and transfers.
This situation makesa country a net debtor to the
rest of the world.
Developing counties may run a current account
deficit in the short term to increase local
productivity and exports in the future.
Gross capital inflow must be equal to CAD

CAD
The Challenge before the emerging market
economies is to leverage foreign savings
and to promote domestic growth with out
having the long term conences of external
payment imbalances.

Capital Account Deficit

investment by the domestic economy in
foreign assets is less than foreign
investment in domestic assets.
Capital Inflows:
Instruments (Debt or Equity)
Duration (Short term or Long Term)
Nature ( Stable or Volatile)

Overall Balance of payments

Current Account Balance =
Balance of Visible Trade(goods) +
Balance of Invisible Trade(services) +
Balance of Unilateral transfers
Capital Account Balance =
Inflow of foreign exchange
outflow of foreign exchange
Official Reserves:
The holdings of foreign reserves
and gold by official institutions like the central bank
Overall Balance of Payment =
Current Account Balance+ Capital account balance+
Official Reserve Account

Uses of BoP Analysis

Overview of Macroeconomic and Monetary
situations of the economy
Study on prospects of direct investment to the
nation
Implications on the exchange rate of the currency
Provides data for economic analysis
Reveals changes in the composition & magnitude
of foreign trade
Provides indications of future repercussions of
countrys past trade performances
Reveals the weak and strong points of a countrys
foreign trade relations

BoP crisis- Factors and causes

Economic factors
Huge development expenditure owing to which there are large
scale imports
Business cycles in terms of recession, depression, recovery and
boom
High rate of inflation running up to large scale imports of
essential goods
Decline of import substitutes which would necessitate and
increase in imports
Change in cost structure of trading partners

Political factors
Political Instability leading to decline in FDI and FII
Populism policies which may encourage imports

Social factors
Change in tastes and preferences leading to demand changes
Cross border prejudices which may lead to expensive sources of
imports

India's current account deficit seen

at 2 per cent of GDP in FY14: Crisil

CAD to print 2 per cent of GDP in

2013-14, the lowest since 2007-08...
The current account deficit, which
had touched an all-time high of 4.8
per cent in FY13 - leading to a
massive depreciation in the rupee will improve to the 2 per cent level
this fiscal year on a heavy
contraction in imports

 Finance Minister P Chidambaram last

week said the current account deficit
would be contained under $40 billion.
During the middle of the year,
widening current account deficit was
one of the biggest threats to
macroeconomic stability and also
battered the rupee, which plunged to
a life-time low of 68.85 to the dollar
on August 28 last year.

 But effective measures taken by the

Reserve Bank of India (RBI) and the
government saw the rupee rallying
back over 12 per cent since then.

"The sharp contraction in imports in

this fiscal has been the primary factor
that has contained the trade deficit.

 THANK YOU