Balance of payments and foreign exchange

Balance of Payments is a systematic record of all economic transactions undertaken by residents of one country i.e. households, firms and the government with their counterparts in rest of the world. It consists of:

1. Current Account,

2. Capital Account and

3. Reserve Account.

The Current Account covers transactions in goods and services and transfers during the current period. Current Account = Value of Exports- Value of Imports + Net Transfers from Abroad = Net Exports + Net Transfers from Abroad

The current account records exports and imports in goods and services and transfer payments. When exports exceed imports, there is a trade surplus and when imports exceed exports there is a trade deficit.

Directorate General of Foreign Trade (DGFT) organisation is an attached office of the Ministry of Commerce and Industry and is headed by Director General of Foreign Trade. Right from its inception till 1991, when liberalization in the economic policies of the Government took place, this organization has been essentially involved in the regulation and promotion of foreign trade through regulation. Keeping in line with liberalization and globalization and the overall objective of increasing of exports, DGFT has since been assigned the role of “facilitator”. The shift was from prohibition and control of imports/exports to promotion and facilitation of exports/imports, keeping in view the interests of the country.

Foreign Trade Policy of India has always focused on substantially increasing the country’s share of global merchandise trade. Accordingly the Government of India has been taking various steps towards boosting its trade with the rest of the world by adopting policies and procedures which would help to increase and facilitate both exports and imports with the other countries of the world.

India’s exports declined by 1.3 per cent and 15.5 per cent in 2014-15 and 2015-16 respectively. The trend of negative growth was reversed somewhat during 2016-17 (April-December), with exports registering a growth of 0.7 per cent to US$ 198.8 billion from US$ 197.3 billion in 2015-16 (April-December). During 2016-17 (AprilDecember) Petroleum, oil and lubricants (POL) exports constituting 11.1 per cent of total exports.

India’s exports to Europe, Africa, America, Asia and CIS and Baltics declined in 2015-16. However, India’s exports to Europe, America and Asia increased by 2.6 per cent, 2.4 per cent and 1.1 per cent respectively in 2016-17 , while exports to Africa declined by 13.5 per cent. USA followed by UAE and Hong Kong were the top export destinations.

Value of imports declined from US$ 448 billion in 2014-15 to US$ 381 billion in 2015-16, mainly on account of decline in crude oil prices.Top three import destinations of India were China followed by UAE and USA in 2016-17.

India’s trade deficit declined by 13.8 per cent (vis-à-vis 2014- 15) to US$ 118.7 billion. Furthermore, it declined by 23.5 per cent to US$ 76.5 billion in 2016-17 (April-December) as compared to US$ 100.1 billion in the corresponding period of previous year.

The exchange rate policy is guided by the broad principle of careful monitoring and management of exchange rates with flexibility, while allowing the underlying demand and supply conditions to determine exchange rate movements over a period in an orderly manner. Subject to this predominant objective, RBI intervention in the foreign exchange market is guided by the objectives of reducing excess volatility, preventing the emergence of destabilizing speculative activities, maintaining adequate level of reserves, and developing an orderly foreign exchange market.

In modern monetary policy, a devaluation is an official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency or currency basket. In contrast, a depreciation is a decrease in a currency’s value (relative to other major currency benchmarks) due to market forces under a floating exchange rate, not government or central bank policy actions.

India has been experiencing trade deficit for more than a couple of decades. The value of Indian rupee  has been fluctuating and devaluation could not bring sufficient impact to the export sector. This is because the Indian economy is heavily dependent upon imported energy and industrial goods.

Foreign exchange  

Foreign exchange is the exchange of one currency for another or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around the clock.

Foreign exchange transactions encompass everything from the conversion of currencies by a traveler at an airport kiosk to billion-dollar payments made by corporations, financial institutions and governments. Transactions range from imports and exports to speculative positions with no underlying goods or services. Increasing globalization has led to a massive increase in the number of foreign exchange transactions in recent decades.

The global foreign exchange market is the largest and the most liquid financial market in the world, with average daily volumes in the trillions of dollars. Foreign exchange transactions can be done for spot or forward delivery. There is no centralized market for forex transactions, which are executed over the counter and around the clock.

The foreign exchange market is unique for several reasons, mainly because of its size. Trading volume in the forex market is generally very huge. As an example, trading in foreign exchange markets averaged $5.1 trillion per day in April 2016, according to the Bank for International Settlements, which is owned by 60 central banks, and is used to work in monetary and financial responsibility .

Trading in the Foreign Exchange Market

The market is open 24 hours a day, five days a week across major financial centers across the globe. This means that you can buy or sell currencies at any time during the day.    

The foreign exchange market isn’t exactly a one-stop shop. There are a whole variety of different avenues that an investor can go through in order to execute forex trades. You can go through different dealers or through different financial centers which use a host of electronic networks.

From a historic standpoint, foreign exchange was once a concept for governments, large companies and hedge funds. But in today’s world, trading currencies is as easy as a click of a mouse — accessibility is not an issue, which means anyone can do it. In fact, many investment firms offer the chance for individuals to open accounts and to trade currencies however and whenever they choose.

Foreign exchange of india

The Foreign exchange reserves of India are India’s holdings of cash, bank deposits, bonds, and other financial assets denominated in currencies other than India’s national currency, the Indian rupee. The reserves are managed by the Reserve Bank of India for the Indian government and the main component is foreign currency assets.  Foreign exchange reserves act as the first line of defense for India in case of economic slowdown, but acquisition of reserves has its own costs Foreign exchange reserves facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.  India’s total foreign exchange (Forex) reserves stand at US$426.0824 billion with foreign exchange assets (FCA) component at US$400.9782 billion, gold reserves at US$21.4842 billion, SDRs (Special Drawing Rights with the IMF) of US$1.5406 billion and US$2.0794 billion reserve position in IMF in the week to April 13, 2018, as per Reserve Bank of India’s (RBI) weekly statistical supplement published on April 20, 2018. The Economic survey of India 2014-15 said India could target foreign exchange reserves of US$750 billion-US$1 trillion.

As of September 2017, India’s foreign exchange reserves are mainly composed of US dollar in the forms of US government bonds and institutional bonds. with nearly 5% of forex reserves in gold. India is, coincidentally the world’s largest gold consuming nation. The FCAs also include investments in US Treasury bonds, bonds of other selected governments and deposits with foreign central and commercial banks. India is at 8th position in List of countries by foreign-exchange reserves , just below Republic of China (Taiwan) and Russia.

Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves. Reserve Bank of India accumulates foreign currency reserves by purchasing from authorized dealers in open market operations. Foreign exchange reserves of India act as a cushion against rupee volatility once global interest rates start rising.  The Foreign exchange reserves of India consists of below four categories; Foreign Currency Assets Gold Special Drawing Rights (SDRs) Reserve Tranche Position.

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