In case of BoP Deficit, why will the Government run down its own reserves by selling Foriegn currency in the foreign Exchange Market?????
Shouldnt the government buy more foreign currency,boost its Foreign Reserves and finance BoP deficit via these Reserves????
In case of BoP deficit,will the government purchase its OWN currency or sell its OWN currency???
Please explain this process in detail and simple language, both accountibg wise and economics wise???
Bop deficit occurs when foreign currency payment becomes greater than foreign currency receipt. So just as to balance the BoP deficit, Govt disposes off some foreign currency in foreign markets to exchange them with own currency.
Finally disposing off the foreign currency will decrease the stock of foreign reserves and there may be a balance in BoP.
Also,Foreign currency is sold for the purchase of our own currency.
No. Buying foreign currency means selling our own currency in exchange of foreign currency. So, Govt shouldn't buy more foreign currency because buying foreign currency will lead to the decrease in our own currency and increase in the stock of foreign reserves. So BoP deficit will never be balanced.
In case of BoP deficit, govt will not sell its own currency, rather than it purchases, just because during the course of balancing BoP deficit, foreign currency is sold for the exchange of our own currency. Since BoP deficit always shows a debit balance, and purchase of own currency is credit. So to balance the BoP deficit, it is mandatory to purchase our own currency.
Finally disposing off the foreign currency will decrease the stock of foreign reserves and there may be a balance in BoP.
Also,Foreign currency is sold for the purchase of our own currency.
No. Buying foreign currency means selling our own currency in exchange of foreign currency. So, Govt shouldn't buy more foreign currency because buying foreign currency will lead to the decrease in our own currency and increase in the stock of foreign reserves. So BoP deficit will never be balanced.
In case of BoP deficit, govt will not sell its own currency, rather than it purchases, just because during the course of balancing BoP deficit, foreign currency is sold for the exchange of our own currency. Since BoP deficit always shows a debit balance, and purchase of own currency is credit. So to balance the BoP deficit, it is mandatory to purchase our own currency.