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???

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??? rndia's BOP— Account 20t 1.12 Item Credit J. Foreign investment 297,890 Loans 3. Banking Capital 4. Other Capital 5, Ru debt service TO] Ca account 128.615 1.064 569, 1 73 Debit 72,000 35.978 Net 43.%02 28 ss7 58.618 -34.917 -139 475 552 Mind, sum ofcurrent and zero. A current account always matched by an equal surplus dencitl In capital AS per data given the preceding table Secuon . 200 - 70. difference between and 18)). the deficit or 130 crores on current account as above bysurplusor crores on capital account (l.c., net Ilow of capital worth 130 crore), Thus, balance ofpayment which consists of current account and capital account stands equilibrium, its credit Side equal to Its debit Side table in Secuon 108). uraccount is always balanced by a surplus in another account. In conclusion, we can say that the Current Account [s that part oJBalance of Payment A-count which shows all payments made or received In respect OJ goods and services payment of interest on past lcndings and borrowings. Capttal Account Is that part Account which shows all payments made or received by way oJsett11ng o/d debts or creating new debts. There is third category (besides current account and capital account) called reserve account which records transactions central bank In BOP statement. These transactions are called as accommodating or •below the line' transactions. It relates to runntna down (Ots reserves of Joreign exchange bu selling Joreign currency In Jore•iqn evchange market in a situation OJ dencit. The decrease (or Increase) in reserves Ls called the overall Enlance efpayments deficit (or-surplus). 9.5 Structure Of BOP Accounts in India A balance or payment account Is a complete statement of a countrys receipts and panuent.s in foreign exchange resulting from international economic transactions. The structure is composed of three sections. namely: (i) Current Account, (II) Capital Account and Reserve use ( Overall balance of payment) Current account Is concerned With exports and Imports 01 goods. services (invisibles) and unilateral transfers. Capital account consists of commercial borrowings. investments, capital transfers, etc Overall balance of payment Is the net result of total of current account and capital account after dc[iclt in one account is offset Mth surplus in another account. Mind, when an individual spends more than his income, hc

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.

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