India's Economic interaction with the world

India’s economic interaction with the world

                                                                                                          

Current Account	Trade account	1.      Export of primary and secondary sector goods	X	If X>M then Trade Account surplus
		2.      Import of primary and secondary sector goods	M	If X<M then Trade Account surplus
		3.      Trade balance	X-M	If X=M then Neutral Trade
	Invisible Account	4.      Invisible Balance (a)    Factor Service balance (b)   Nonfactor service balance		Invisible account surplus
				Invisible account deficit
				Invisible account balance
	Goods and services  account	5.      Goods and services balance(3+4b)		Inserted in Oct,2007 GSAS,GSAD,GSAB*
	6.    Current account balance(3+4)			CAS,CAD,CAB**
Capital   Account	7.      External assistance		Debt Items(means  Foreign Debt Increases)
	8.      External commercial borrowings
	9.      Non residents accounts
	10.  Foreign Investment a.      FDI b.      FPI(Foreign Portfolio investment)		Non Debt Items
	11.  Others
	12.  Capital Account Balance	(7+8+9+10+11)		Annual Statement of pure financial transactions and unassociated with flow of goods and services
	13.  Foreign Exchange Reserve (forex)

*Goods and services account surplus, deficit and balance

** Current account surplus, deficit and balance

	Items
Current Account Comprises	Merchandise Imports and exports
	Invisibles	Net factor Services	Travel,Tranport,Insurance,GNIE and Miscellaneous
		Income
		Transfers	Grants, Gifts and Remittances
	Basis of classification
Capital account Comprises	By Instrument	Non debt liabilities	FDI,FPI/FII’s and ADR’s/GDR’s
		Debt Liabilities	Loan,ECB’s and NRI deposits
	Maturity Period

Non Factor Services refer to all invisible receipts (i.e. receipts/expanses from services, remittances etc) or payments that are not attributable to any of the conventional `factors of production' (i.e labour - say - remittances from overseas migrants and capital - income from investments, interest payments, dividend repatriation etc).
Thus, non-factor services include any foreign exchange earnings or expenses on account of tourism, shipping, freight and various `miscellaneous' sub-heads like software, BPO etc.

The difference of export and import of goods and services is a part of domestic income. Here services mean non-factor services like banking, shipping, insurances etc. These services are different from the factors services such as labour, capital, etc.

Therefore, the factor income earned from abroad (compensation of employees, interest, profit, etc.) is not included in the export and import of these services.

Imported goods and non-factor services are used as intermediate goods and services for domestic product. Goods and non-factor services which are exported are part of domestic product.

Therefore, the difference of export and import of goods and non-factor services (this is also called as net export of import of goods and non-factor services) is included in the domestic product. For obtaining national product, net factor income earned from abroad should be added to domestic product or income.

FOREIGN EXCHANGE RESERVES

India’s foreign exchange reserves comprise foreign currency assets (FCA), gold, special drawing rights (SDRs), and reserve tranche position (RTP) in the International Monetary Fund (IMF). The level of foreign exchange reserves is largely the outcome of the RBI’s intervention in the foreign exchange market to smoothen exchange rate volatility and valuation changes due to movement of the US dollar against other major currencies of the world. Foreign exchange reserves are accumulated when there is absorption of the excess foreign exchange flows by the RBI through intervention in the foreign exchange

market, aid receipts, and interest receipts and funding from the International Bank for Reconstruction and Development (IBRD), Asian Development Bank (ADB), International Development Association (IDA), etc.

FCAs are maintained in major currencies like the US dollar, euro, pound sterling, Australian dollar, and Japanese yen. Both the US dollar and euro are intervention currencies; however, reserves are denominated and expressed in the US dollar only, which is the international numeraire for the purpose. The movement of the US dollar against other currencies in which FCAs are held therefore impacts the level of reserves in US dollar terms. The level of reserves declines when the US dollar appreciates against major international currencies and vice versa. The twin objectives of safety and liquidity have been the guiding principles of foreign exchange reserves management in India with return optimization being embedded strategy within this framework.