The growing strength of India’s BoP observed in the post reform period since the crisis of 1991 continued in 2005-2006. This growing strength was inspite of a widening current account deficit to the tune of US dollar 9.2 million that is equivalent to 1.1 per cent of GDP in 2005-2006. Rising foreign investment together with a sharp revival of inflows of non-resident deposits maintained a strong balance in the capital account visà- vis high level of reserves. Given such robust external position R.B.I. had deemed it opportune to revisit the issue of full Capital Account Convertibility. An insight into India’s BoP Capital Account is possible with the following table. In this scenario, Indian companies hand holdings with international agencies (taxing loans & equity partnership) plans to make huge investments in retails and infrastructure. Also many companies are boosting up their foreign country operations. They are less perturbed about the rising inflation rate interest rate or the other tight money measures adopted by the Government. This could be due to favorable consolidation exposure and the opportunity in covering their risk in currency future market.

Question :

1) What is trade deficit?

2) What according to you would be the reason for India’s growing trade deficit.

3) Find out the capital account balance from the above table and explain the main forms of FDI and FII flows into India?

4) What are the tight money policy measures used in India in the recent past?