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Balance Of Payment (II. Capital Account: Like capital receipts/…
Balance Of Payment
All economic transactions (govt & private) of a country with the outside world in a given year.
Double entry book keeping
=> recording each transaction twice consisting of two opposite entries with equal values (credit and debit entry)
I. Current Account
: Like revenue receipts/ expenditures.
Single time and one way
1. Export
: receipts against export of
goods
.
2. Import
: payment for import of
goods
.
3. Trade Balance
= Export - Import
4. Invisibles
A. Services
: Export & import of services e.g. travel, transportation, insurance, GNIE (govt not included elsewhere), communication, construction, financial, IT, ITES, news agency, management etc
B. Income
: income from investments in the form of dividends, profit and interest from loans, rent from house property and income generated through employment.
C. Transfers
: Grants, gifts etc. which does not have quid pro quo (one way).
Current Account Balance
= Trade balance + Net Invisibles
II. Capital Account
: Like capital receipts/ expenditures.
Two way and multiple transactions
.
i. External Assistance
: transactions of official (govt) bilateral and multilateral loans.
ii. External Commercial Borrowings
: loan transactions by commercial enterprises. In the form of
Bank loans
,
Buyers' credit
,
Suppliers' credit
,
securitised instruments
availed from non-resident lenders with maturity
> 3 years
. ECB can be raised only for specific purposes. It also covers FCCBs and FCEBs.
iii. Short Term debt
: trade credit for maturity < 3 years.
iv. Banking Capital
: Foreign asset of CBs, Foreign liabilities of CBs, Others.
v. Foreign Investments
: FDI and FPI
vi. Other flows
: include delayed export receipts, leads and lags in export receipts, funds held abroad.
Capital Account Balance
= sum of i to vi
Foreign Currency Convertible Bonds (FCCB):
bonds issued by an Indian Company expressed in foreign currency. Principle and interest payable in that currency only.
Foreign Currency Exchangeable Bonds:
Issued to persons who are
residents outside India
. Expressed in
foreign currency
. Exchangeable into equity share of another company (Offered Company). P&I payable in that currency only.
Non-resident Deposits
: Deposits received from NRIs e.g.
Foreign Currency NR (Banks) or FCNR(B)
,
NR External Rupee A/c or NR(E)RA
,
NR Ordinary Rupee A/c or NRO
FCNR(B) held in currencies - USD, Pound Sterling, Euro, Japanese Yen, Australian $, Canadian $. Only term deposits of 1-3 years maturity.
NR(E)RA held in Indian Rupee. Term deposits(1-3 years) and Saving deposits.
NRO held by Indians ordinarily living abroad. Held in Indian Rupee. Current, Savings, RD, FD accounts.
Overall Balance or BoP
= Current Account Balance + Capital Account Balance
Forex Reserves
: Overall balance is added to Forex reserves.
Consists of
Foreign Currency Assets
,
Gold Stock of RBI
,
SDR
holdings of govt,
Reserve Tranche
FDI
: Investment through the mode other than the stock exchange.
a. Investment in an unlisted Indian Company
b.
>10%
investment in list Indian Company
Direct contact between the
securities buyer
and the
seller company
.
Aravind Mayaram Committee
on FDI and FII suggested the investment in a company above
10%
needs to be treated as FDI.
If investment comes below 10% subsequently, it shall be
continued as FDI
.
Portfolio or Rentier Investment
: Investment through
stock exchange
, in various FIs like shares, debentures.
Types
- FII, Depository Receipts, Offshore Funds.
Foreign Institutional Investment (FII):
Portfolio investment by FIs like MFs, Insurance Cos, Pension Funds, etc. in shares and debentures.
Depository Receipts
: Companies go abroad to sell their shares in foreign capital market e.g. American DR, Global DR, Indian DR etc.
Offshore Funds
: Money raised from offshore destination like Cayman Islands, Isle of Man, Mauritius and British Virgin Islands etc. by MFs and other funds.
SDR Holdings
: reserve created by IMF to help countries that have BoP problem. Members have to contribute to this account in proportion of their IMF Quota (membership fee).
Reserve Tranche
: A portion of funds. Consists of India's quota to IMF and lending to General Resource Account (pool of members' quota payment) of IMF.
A member required to pay
25%
of its quota to SDRs or in foreign currencies acceptable to IMF.
If any money was lent in foriegn currency or SDR > the quota to IMF's General Resource Account, it also forms part of Reserve Tranche.
ECB covers FCCB and FCEB