THE SENIOR ANALYST
Indian govt. paper gave a yield of 7.92% and the
Rupee Dollar exchange rate was 44.71. However,
in 2011 when the first round of tapering begun in
the US, FIIs assumed a short position in the Indian
Bond market selling in huge volumes. Thus, the
price of G-sec fell and the yield rose to 8.55%
because of huge selling and the FIIs took more
dollars along with them out of the country. The
Balance of Payment equation which was earlier
balanced turned skewed because of the change in
current account.
Balance of Payment (Bop) = Current account +
Capital account
A country should ideally have bop=0 i.e. it is a
zero sum game. A deficit in current account
should be filled by a surplus in capital account.
The payment side of current account includes
imports, outward remittances by NRI. Similarly,
the earning side is mainly from exports, inward
remittances by foreigners or money sent by NRIs
to their family. The capital account part in bop
mainly includes investments by FIIs and FDI. India
has a chronic trade deficit problem. So to keep
our bop zero we need our capital account to be
surplus. One of our major import is petroleum
products and in the last few decades since the
post 1991 era, we have been getting a lot of
dollars via the FII and FDI route which have
financed our imports and kept our forex reserves
intact.
In 2011, India’s current account deficit was close
to 5% of the GDP. This was significantly higher
than an average of 3-3.5% in the previous year.
Because of weak macroeconomic sentiments
coupled with weak demand across the globe,
policy logjam in India, corruption and poor )