International Finance Management

02 Jul


Following are the data for India’s B.O.P.

  Year 2004-05 Rs (in Mn)
1) Merchandise Exports 3,62,661
2) Merchandise Imports 5,33,778
3) Income on Travel, Transportation MIS 2,27,762
4) Payments on Travel, Transportation MIS 1,63,353
5) Receipts for Maintenance of Embassies 1,812
6) Payments for Maintenance of Embassies 1,172
7) Unrequired Transfer Received 96,318
8) Unrequired Transfer Outwards 1,939
9) Investment Income Received 21,098
10) Investment Income paid to Foreign Residents 39,014
11) Foreign Investment (FDI, FPI) Received 2,06,696
12) Foreign Investment made by Indian Films 1,53,377
13) Other Capital Receipts 2,90,100
14) Other Capital Outflows 1,98,016


1)  Calculate balance of Visiable Trade?

2)  Calculate balance of Invisiable Trade?

3)  Calculate balance of Capital Account?

4)  Calculate change in Reserves?



The Indian Foreign Exchange market has grown substantially during the liberalization period of the Indian economy. The growth in the retail segment of the market has increased the foreign exchange business turnover of `Authorised Dealers’ while the increase in tourism has boosted the business volumes of `Money Changers’.

This period has seen several landmark developments such as change in the vehicle currency, introduction and withdrawals of the `Liberalised Exchange Rate Management System (LERMS), change in the modality of quoting exchange rates, stepwise introduction of convertibility of the Indian Rupee etc.  The Foreign Exchange Dealers Association of India (FEDAI) has played a significant part in helping the market to assimilate these changes thereby ensuring the smooth functioning of the market.


1)  Define Foreign Exchange Market? What are its characteristic features?

2)  What were the provisions of LERMS?

3)  What are the function of FEDAI?

4)  Which is the currency used as vehicle currency in India?

5)  Who are `Money Changers’?



  US $ Millions 1998-1999 1999-2000
  Exports 34,298   38,285  
  Imports 47,544   55,283  
  Trade Balance   -13,246   -17,098
  Invisibles 9,208   12,935  
  Current A/c Balances   -4,038   -4,163
  External Assistance 820   901  
  NRI Deposits 1,742   2,140  
  Foreign Investments 2,412   5,191  
  Borrowings & Others 3,591   2,010  
  Total Capital A/c   8,565   10,242
  Overall Balance   4,222   6,402

Given the above data.


1)  Compile the basic balance?

2)  Examine the trade balance vis-à-vis the current account balance and explain its effect on the economy?

3)  Explain the behavior of the Capital Account entries and how can they affect the economy?

4)  Is the increasing positive `Overall balance’ good for the economy? Why?



Following the experience of successive financial crises in countries such as Maxico, Russia, Brazil, Turkey & Argentina. Besides South-East Asian countries over the past decade. It is now widely held within policy circles in developing countries that full capital account convertibility, which allows any entity to transfer their funds at will in and out of a country, causes more harm than good.

Introducing capital account convertibility at this stage would further encourage such speculative inflows and reckless commercial borrowings.

This increased risk within the country’s financial system had the potential of harting the common people, who would have to bear the brunt of adjustments once the boom comes to an end convertibility will increase the number of billionaires in India, not through entrepreneurial profit but through untaxed capital gains. This massive inflow of

portfolio investments does not have any positive impact on the productive sectors of the economy.


1)  What is capital account convertibility?

2)  What are the risks in capital account convertibility in India context?

3)  What is the present status of capital account convertibility in India?

4)  Bring out the arguments in support of convertibility?