“The balance of payments of a country is asystematic record of all economic transactionsbetween the residents of a country and the rest ofthe world.

It presents a classified record of allreceipts on account of goods exported, servicesrendered and capital received by residents andpayments made by them on account of goodsimported and services received and capitaltransferred to non-residents or foreigners.”

–Reserve Bank of India

Balance of payments (BOP)

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

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 Current Account

records the net change in ownership of foreign assets.

Implications of current transactions for the country’s 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 country’s international options

BOP on Capital Account

Steady accretion to reserves

Moderate levels of current account deficit (CAD)

Changing composition of Capital inflows

Flexibility in exchange rates

Sustainable external debt levels

Indicators of Strengths of a Nation

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 makes a 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

Current Account Deficit

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.

CAD

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)

Capital Account Deficit

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

Overall Balance of payments

Overview of Macroeconomic and Monetary situations of the economyStudy on prospects of direct investment to the nationImplications 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 country’s past trade performances Reveals the weak and strong points of a country’s foreign trade relations

Uses of BoP Analysis

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

BoP crisis- Factors and causes

• 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

India's current account deficit seen at 2 per cent of GDP in FY14: Crisil

• 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