Autonomous items

Dirty Floating

Devaluation refers to the fall in the value of domestic currency in relation to a foreign currency, as planned by the government. It is the government which reduces the value of domestic currency in terms of the foreign currency Whereas, Depreciation refers to the fall in the value of domestic currency in relation to a foreign currency. It is the free play of the forces of demand and supply of foreign exchange in the Foreign exchange market, which determines the exchange rate and not the government. While devaluation causes a desired fall in the value of rupee (to promote exports and curb imports) depreciation may cause undesired fall as well, in the value of domestic currency, as the import bill of the government may become very high, leading to a rise in the Current Account Deficit (CAD) and fiscal deficit to unmanageable limits.

1.Balance of Trade refers to the balance occurring on account of export and import of goods only (visible items) whereas, current account balance includes the Balance of Trade (BOT) as well as the balance on Invisibles.
2.Current account balance isa wider phenomenon than BOT.The difference lies in 'the balance on Invisibles'. In BOT, we exclude the balance onInvisibles but in current account balance we include it.

(i) Overall balance is reflected in the 'official reserve transactions' of the RBI, as it is the custodian of foreign exchange reserves of the country. All foreign exchange transactions in the country take place through RBI. If the overall balance is positive, it causes an increase in official reserves, if overall balance is negative, it causes a decrease in official reserves. Hence,
(ii) Current Account Surplus + Capital Account Surplus = Increase in Official Reserves
(iii) Current Account Deficit + Capital Account Deficit = Decrease in Official Reserves

Deficit in BoP refers to a situation when receipts of the country arising out of autonomous transactions are less than the corresponding payments to the rest of the world during the period of an accounting year. It highlights our net liabilities towards rest of the world.

Significance of deficit in BoP

There is positive as well as negative significance is that, BoP deficit may be occurring on account of such capital imports which are essential to speed up the process of growth and development in the economy. The negative significance is that it highlights our liabilities to the rest of the world. Greater the liability, greater is the strain in our GDP by the way of payments to the rest of the world.

Autonomous transactions are the transactions between the residents of two countries which take place due to the consideration of profit. Autonomous items are not conditioned by the BoP status of the country, i.e. these are independent. These transactions are not done to establish identity of BoP. These are also known as 'above the line items' and take place in both the accounts of BoP, i.e. current and capital account.

Accommodating transaction are those transactions which are not done due to the consideration of profit but to restore identity of BoP. These are undertaken to maintain balance in the BoP account. These transactions are also known as 'below the line items' and include foreign exchange reserves and borrowings to meet BoP deficit

With the rise in foreign exchange rate in India, the demand for foreign currency increases. This rise in exchange rate implies depreciation in domestic currency. It encourages exports from a country and discourages imports from rest of the world.

Balance of Trade=Value of Exports- Value of Imports

              -RS500=RS400-Value of Imports

\(\therefore \) Value of Imports=RS.9000 crore

Foreign exchange refers to any foreign currency. Thus, US dollars, British pounds are foreign exchange for India. Foreign exchange rate is the price of one currency in terms of another currency. It is the rate at which exports and imports of a country are valued during a period of time.
There is an inverse relation between foreign exchange rate and demand for foreign exchange. Higher the foreign exchange rate, lower the demand for foreign exchange and lower the foreign exchange, rate, higher the demand
for foreign exchange. Suppose the' price of US dollar in India falls from Rs 50 to Rs 40. It means that earlier Indian people had to part with Rs 50 to buy one dollar worth of goods from USA. Now they have to part with Rs 40 to buy one dollar worth of goods from USA. It implies that American goods have become cheaper for Indian buyers. At a lower price of US dollar, India is ready to buy more goods from USA.
This raises the demand for US dollars. So, lower the price of US dollars,higher is the demand for US dollars and vice versa. Graphically, the demand curve of foreign exchange is downward sloping y signifying the inverse relation between foreign exchange rate and demand for foreign exchange. In the figure, at price Or, the demand for foreign exchange is OF. At a lower price ' the demand is \(OP_{ 0 }\) , i.e., higher. At a higher price \(OF_{ 1 }\) , demand is \(OP_{ 1 }\) i.e., lower than OF.