(a) In which sub-account and on which side of balance of payments account will foreign investments in India be recorded? Given reasons.(b) What will be the effect of foreign investments in India on exchange rate? Explain. (2024)

FAQs

(a) In which sub-account and on which side of balance of payments account will foreign investments in India be recorded? Given reasons.(b) What will be the effect of foreign investments in India on exchange rate? Explain.? ›

It is recorded on the credit side of Balance of Payments Account as it leads to inflow of foreign exchange. ii Foreign investment in India will lead to increase in the supply of foreign exchange.

i 'Make in India will increase supply inflow of foreign exchange in India causing improvement in the balance of payments position. ii Import of pulses will lead to outflow of foreign exchange from the country causing adverse effect on balance of payment position.

Foreign direct investment raises the supply of foreign exchange leading to downward influence on the price of foreign exchange.

Detailed Answer: i In Capital Account and on debit side of BOP the lending of Indian investors to abroad will be recorded. Indian investors lending abroad cause an outflow of foreign exchange from the country. Thus it is recorded as negative item in the Capital Account of BOP.

i This will reduce import of gold and thus will have a favourable effect on BOP situation as demand for foreign exchange will fall. ii Rise in price of foreign currency will make imports costlier so import will fall and it will be favourable for BOP as demand for foreign exchange will fall.

India's current account balance recorded a deficit of US$ 8.3 billion (1.0 per cent of GDP) in Q2:2023-24, lower than US$ 9.2 billion (1.1 per cent of GDP) in Q1:2023-24 and US$ 30.9 billion (3.8 per cent of GDP) a year ago [i.e., Q2:2022-23] ¹.

The balance of payments crisis in India in 1991 was caused by the country's foreign exchange reserves falling to a level where the Government could no longer service its external debt. India's foreign exchange reserves fell below the critical level, and it became impossible for India to finance its trade deficit.

i Foreign investments will be recorded in the Capital Account of the BOP Account because these give rise to foreign exchange liabilities. Foreign investment will be recorded on the credit side because these bring in foreign ii Foreign investment add to supply of foreign exchange.

It can affect domestic investment, and domestic companies adversely. Small companies in a country may not be able to withstand the onslaught of MNCs in their sector. There is the risk of many domestic firms shutting shop as a result of increased FDI. FDI may also adversely affect the exchange rates of a country.

Job Creation and Employment: Most foreign direct investment is designed to create new businesses in the host country, which usually translates to job creation and higher wages. Technology Transfer: Foreign direct investment often introduces world-class technologies and technical expertise to developing countries.

What is foreign currency account outside India? ›

A resident individual can open a foreign currency account with a bank outside India in the following cases: A resident student who has gone abroad for studies. All credits to the account from India should be made in accordance with FEMA, rules and regulations made thereunder.

Foreign investments are recorded in the capital account of balance of payments. Foreign exchange received on account of export of Jute will be recorded in capital account.

Yes. RBI permits Indians to open and maintain a bank account overseas. Under the Liberalized Remittance Scheme of the RBI, sending money to your account overseas is a legitimate purpose. RBI revised the LRS purpose code S0023 to 'Opening of foreign currency account abroad with a bank' in Feb 2016.

Bonus shares to equity shareholders are not included in the balance of payments account. The balance of payments (BoP) is a record of all economic transactions between residents of a country and the rest of the world over a specific period.

To correct a balance of payments deficit , a country can devalue its currency, increase exports, reduce imports, or implement fiscal austerity. Devaluing the currency can make a country's exports cheaper and imports more expensive, thereby improving the balance of payments.

Nominal Account is not a component of Balance of Payments.

First, the balance of payments is a factor in the demand and supply of a country's currency. For example, if outflows exceed inflows, then the demand for the currency in the domestic market is likely to exceed the supply in the foreign exchange market, all else being equal.

A deficit in the balance of payments leads to a higher demand for foreign currency to the detriment of national currency which would depreciate in this situation. However, an exceeding account balance involves a high amount of foreign currency for which the national currency would be exchanged.

The importance of the balance of payment can be calculated from the following points: It examines the transaction of all the exports and imports of goods and services for a given period. It helps the government to analyse the potential of a particular industry export growth and formulate policy to support that growth.