Bop on capital account, Macroeconomics

BOP on Capital Account:

BOP on Capital Account  shows only export and import of capital and  the difference between  the  two represents a country's capital account balance. Capital account  is  important  because movements  in capital  decides  the sustainability of current account deficit as well as exchange rate  trends.  In India, capital inflows or outflows mainly take place  in the  form of FDI and portfolio investment, commercial loans  and banking capital  (NRI deposits including). FDI inflows or outflows are with the intention of buying physical assets to start a business in the home country or abroad on  long term basis. Portfolio investment with a view  to buying financial assets in securities markets and NRI depasits/withdrawal  show  short-term capital movement. External  commercial borrowings  are undertaken both by  government and private sectors from bilateral, multilateral and private sources either on short or  long term  basis. Banking capital records  changes  in foreign assets and liabilities of the Indian banks authorised to deal in foreign exchange.

Capitalinflows increase the banks' liabilities (credit item) while outflows are their assets and  enter debit  items in their accounts. Further two minor  items -rupee debt service  to repay foreign debt  in rupees and other capital accruing on account of delayed receipts of exports - are part of capital account. After adjusting for errors and omissions we get an overall balance, which is nothingbut sum of current and capital account transactions. Under IMF transactions,loans  from  that organisation are a credit  item while repayments are a debitentry in our books.

Drawing down from and accretion to foreign exchangereserves act balancing entry to meet deficit or show surplus respectively elsewhere in BOP. Putting all the entries  together, it is to be remembered that the "Balance of Payments always Balances". A related question is about BOP Equilibrium which requires that any deficit on the current account be matched by an equal surplus on the capital account and vice-versa.  


Posted Date: 11/9/2012 4:51:42 AM | Location : United States

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