To moderate, the RBI bought this excess amount of dollars (by paying rupees in the market) and added it to its forex reserves. Left unaddressed, the excess $63.5 billion would have led to a rise in the rupee’s exchange rate. There was a $90 billion surplus on the capital account - meaning net-net $90 billion came into the country on such transactions - and a $26.6 billion deficit in the current account - meaning net-net $26.6 went out of the country on such trades. This is why the RBI’s forex reserves have gone down sharply since the war in Ukraine started in February.īetween April and December, the situation was the opposite. This will soak up a lot of rupees from the market, thus moderating the demand-supply gap between rupee and dollars. To soften the rupee’s fall, the RBI would sell in the market some of the dollars it has in its forex reserves. This process might imply massive fluctuations. If there was no RBI to intervene, then as money started flowing out of India on account of oil and US interest rates, the rupee’s exchange rate would have fallen and continued to do so until buying from India and investing here became attractive again. In other words, a deficit in the current account must be balanced by a surplus in the capital account, or vice versa. The most important thing about the BoP is that the balance of payment always balances. Telling Numbers | Over half of India’s population is still under age 30, slight dip in last 5 years The capital account, on the other hand involves investments (such as an Indian buying land in the US, or a Japanese firm investing in the Indian stock exchange) as well as exchange of loans between India and other countries. Essentially, this refers to export and import of services (such as an Indian company selling software to an American firm, or a European bank providing financial services to some Indians, or simply Indians working abroad sending back money to their families in India). All such transactions generate demand for rupees (among foreigners) and forex (among Indians).Īll transactions involving export or import of goods (cars, gadgets etc) are logged under the “trade account” within the current account.īut people also trade in “invisibles”. In any year, Indians (and/or Indian entities such as companies and governments) and foreign nationals (and/or entities) transact in several different ways. This allows policymakers and analysts to better understand the dynamics of the relative demand for rupees (by foreigners) and forex (among Indians). Each bucket is sub-divided into smaller buckets.
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