Balance of Payments BoP

BoP is a systematic record of economic transactions between Residents and Non-residents of a country for a specific time period

If BoP is Positive	If BoP is negative
More dollars for less rupees	Less dollars for more rupees
Rupee becomes stronger	Rupee becomes weaker
Imports becomes cheaper Exports becomes expensive	Imports becomes expensive Exports becomes cheaper
Bad for Indian exporters	Bad for Indian importers

If BoP is positive, RBI intervenes and purchases dollars and make BoP zero. Such Dollars purchased are added to RBI's Foreign exchange reserve
If BoP is negative, RBI intervenes and sells dollars and make BoP zero. Dollars sold are taken out from RBI's foreign exchange reserve. If there are no enough dollars in its reserve, then BoP Crisis

Components of BoP

NOTE: IMF loans and Special Drawing Rights comes under Capital Account.

(in the decreasing order)

Dollars, Euro, Pound sterling, Canadian dollar, Australian dollar, Japanese Yen [No China's Renminbi ]

It is created by IMF in 1969 to supplement its member countries official reserves
SDR is neither currency nor credit
SDR is an unit of account of IMF and the value was defined on the basis of basket of currencies

Currently, SDR basket has 5 currencies - US Dollars, Euro, Chinese Renminbi, Japanese Yen, Pound sterling (decreasing order of their weightage)

Out of this Quota, part of it is called Reverse Tranche which can be used by respective member country at any time

This reverse tranche is always accessible and is not under immediate obligation to repay those funds to IMF

Nominal Effective Exchange Rate NEER

Real Effective Exchange Rate REER

NEER is weighted average of exchange rates of currencies of India's major trading partners

REER is NEER adjusted to inflation factor

If REER > 100	Currency is overvalued
If REER < 100	Currency is undervalued

Freedom to convert one currency into other internationally accepted currencies is termed as convertibility

Capital account convertibility

Current account convertibility

It is when rupee is fully convertible into another currency for Capital account transactions of Balance of Payments and vice versa

It is when rupee is fully convertible into another currency for Current account transactions of Balance of Payments and vice versa

India is not fully convertible on Capital account [FDI, FII restrictions etc.]

India is fully convertible on current account.

However some restrictions on betting, gambling, prohibited items

Autonomous transactions	Accommodating transactions
When international transactions are made independently of the state of Balance of Payments	When international transactions are made by the net consequence of the state of Balance of Payments whether they are deficit or surplus
They are above the line items in BoP	They are below the line items in BoP

To buy a basket of goods , if we spent 1$ in US, to buy same in India, it takes 18/- to spent

PPP is 60/-(conversion rate) - 18/- (actual expenditure) = 42/-

Purchasing Power Parity Conversion factor= Ratio of PPP/Market Exchange Rate

Ratio for US =1

Ratio for India = 0.3

Ratio for Sweden = 1.3