Editing Content :: Admin Scraper

Chapter

Content type

Position

Value

than it receives from sales to the rest of the world) must finance it by selling assets or by borrowing abroad. Thus, any current account deficit must be financed by a capital account surplus, that is, a net capital inflow. Current account + Capital account ≡ 0 In this case, in which a country is said to be in balance of payments equilibrium, the current account deficit is financed entirely by international lending without any reserve movements. Alternatively, the country could use its reserves of foreign exchange in order to balance any deficit in its balance of payments. The reserve bank sells foreign exchange when there is a deficit. This is called official reserve sale. The decrease (increase) in official reserves is called the overall balance of payments deficit (surplus). The basic premise is that the monetary authorities are the ultimate financiers of any deficit in the balance of payments (or the recipients of any surplus). We note that official reserve transactions are more relevant under a regime of fixed exchange rates than when exchange rates are floating. (See sub heading ‘Fixed Exchange Rates’ under section 6.2.2) Autonomous and Accommodating Transactions International economic transactions are called autonomous when transactions are made due to some reason other than to bridge the gap in the balance of payments, that is, when they are independent of the state of BoP. One reason could be to earn profit. These items are called ‘above the line’ items in the BoP. The balance of payments is said to be in surplus (deficit) if autonomous receipts are greater (less) than autonomous payments. Accommodating transactions (termed ‘below the line’ items), on the other hand, are determined by the gap in the balance of payments, that is, whether there is a deficit or surplus in the balance of payments. In 89 other words, they are determined by the net consequences of the autonomous transactions. Since the official reserve transactions are a Op made to bridge the gap in the BoP, they are seen as the accommodating r ne item in the BoP (all others being autonomous). c c o oo Errors and Omissions m y s It is difficult to record all international transactions accurately. Thus, we have a third element of BoP (apart from the current and capital accounts) called errors and omissions which reflects this. Table 6.1 provides a sample of Balance of Payments for India. Note in this table, there is a trade deficit and current account deficit but a capital account surplus. As a result, BOP is in balance. BoP Deficit Balanced BoP BoP Surplus Overall Balance < 0 Overall Balance = 0 Overall Balance > 0 Reserve Change > 0 Reserve Change = 0 Reserve Change < 0 Reprint 2026-27