question_answer

Indian investors lend abroad. Answer the following questions:

(a) In which sub-account and on which side of the Balance of Payments Account such lending is recorded? Give reasons.

(b) Explain the impact of this lending on market exchange rate.

Answer:

(a) Sub-account - Capital Account.

Balance of payment account - Debit Side.

Lending to abroad by Indian investor will be recorded in the capital account on the debit side of balance of payment account. It is recorded on the debit side because it is the negative item in the capital account of balance of payment as it shows outflow of foreign currency from our country.

(b) This lending will reduce the supply of foreign currency, because lending is the outflow of foreign currency from our country. This reduction in the supply will shift the supply curve from SS to S?S?. The new equilibrium is at point E? where the exchange rate rises from OR to OR1.