Term Paper on BOP Analysis India and Test of Parity Theories

No country in today’s globalized world can be fully insulated from what happens in the global economy and India is no exception to the rule. As the country is increasingly integrated into the world, it cannot remain impervious to developments abroad. The unfolding of the euro zone crisis and uncertainty surrounding the global economy have impacted the Indian economy causing drop in growth, higher current account deficit (CAD) and declining capital inflows. As in 2008, the transmission of the crisis has been mainly through the balance-of-payments (BoP) channel. Export growth has decelerated in the third quarter of fiscal 2011-12, while imports have remained high, partly because of continued high international oil prices. At the same time, foreign institutional investment flows have declined, straining the capital account and the rupee exchange rate that touched an all-time low of ` 54.23 per US dollar on 15 December 2011. The situation, however, is showing signs of improvement in 2012. The rupee has appreciated by 2.6 per cent in January 2012 due to Reserve Bank of India (RBI) intervention, measures to augment supply of foreign exchange in the domestic market, steps to curb speculative activities, and general improvement in India's economic outlook. FII inflows have resumed, lending support to the balance of payments and exchange rate. The global outlook, however, remains uncertain with the situation in Greece teetering on the brink and increasing risk that the contagion will spread to the Portuguese economy. Such a scenario could have serious repercussions for the Indian economy.
To support our theoretical knowledge by the practical experience in the field of foreign exchange system of different countries we are assigned to prepare this report as a partial fulfillment of the course “Foreign exchange & International Risk Management”. Our topic is ‘‘Composition of Balance of Payment & Foreign Exchange Risk Management: India” provided by Dr. M. Masud Rahman, the honorable course teacher. The report is the elaboration of external and internal decision among us.

Objectives of the Report
To demonstrate composition of BOP of India.
To find BOP condition of India.
To identify the causes and consequences of recent crisis in India.
To identify the impact of BOP on foreign exchange of India.
To analyze the relevancy of PPP and IFE theory using economic data.
To test the relevancy of PPP and IFE regression analysis has been used. The result of the analysis is tested against critical value to test whether PPP and IFE hold or not.


Methodologies
The necessary data has been collected from secondary source.
Bangladesh has been used as home country and India has been used as foreign country.
Rupee has been used as foreign currency.
To test the relevancy of PPP and IFE regression analysis has been used. The result of the analysis is tested against critical value to test whether PPP and IFE hold or not.
Regression has been developed on the assumption of 95% confidence level.
Nominal Interest rate are used: Inflation + Real rate of interest.
Data (Statistical analysis): For 10 Years.

Limitations of the study
  •  Raw data was not available for the purpose of total analysis.
  • Qualitative and Quantities analysis are made.
  • We have used some computer software to make the analysis a viable one.
  • We were not familiar with all the terminologies. That's why we had some difficulty in the interpretation.
  •  Inefficiency in some field of analysis.
  • We have not enough information to do analysis.
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