Why sale of domestic currency is considered as debit and purchase as credit? As purchase implies outflow of foreign currency and vice versa? Plz explain in easy and simple way
Dear Riya,
When there is inflow of foreign exchange it is recorded as a credit item in BOP. On the other hand, when there is outflow of foreign exchange it is recorded as debit item in BOP.
Official reserve transactions are those accommodating transactions carried out by the central bank that lead to change in the official reserves of the economy. In order to correct the disequilibrium in BOP sometimes the central bank carries out transactions in foreign exchange.Whenever there is rise in foreign exchange reserves it is recorded as a credit item in BOP. On the other hand, whenever there is fall in he exchange reserves it will be recorded as a debit item in the BOP.
Now, when there is purchase of own currency there would be a rise in the foreign exchange reserves. So, it will be recorded as a credit item. On the other hand, when there is sale of own currency in exchange there would be a fall in the foreign exchange reserves. So, it will be recorded as a debit item.
In case you still face any doubts, feel free to ask again.
When there is inflow of foreign exchange it is recorded as a credit item in BOP. On the other hand, when there is outflow of foreign exchange it is recorded as debit item in BOP.
Official reserve transactions are those accommodating transactions carried out by the central bank that lead to change in the official reserves of the economy. In order to correct the disequilibrium in BOP sometimes the central bank carries out transactions in foreign exchange.Whenever there is rise in foreign exchange reserves it is recorded as a credit item in BOP. On the other hand, whenever there is fall in he exchange reserves it will be recorded as a debit item in the BOP.
Now, when there is purchase of own currency there would be a rise in the foreign exchange reserves. So, it will be recorded as a credit item. On the other hand, when there is sale of own currency in exchange there would be a fall in the foreign exchange reserves. So, it will be recorded as a debit item.
In case you still face any doubts, feel free to ask again.