Indian investors borrow from abroad. Answer the following:
- In which sub-account and on which side of the Balance of Payments Account will this borrowing be recorded? Give reason.
- Explain what is the impact of this borrowing on exchange rate.
CBSE FOREIGN - SET 1 2016
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- Borrowings from abroad are recorded in the capital account of the B.O.P. because these give rise to foreign exchange liabilities. These are recorded on the credit side because these bring foreign exchange into the country.
- Borrowing from abroad raise supply of foreign exchange. Demand for foreign exchange remaining unchanged, exchange rate is likely to fall.
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