Question

Indian investors lend abroad. Answer the following questions
(a) In which sub-account and on which side of the Balance of Payments Account such lending is recorded ? Give reasons
(b) Explain the impact of this lending on market exchane rate

Answer 1

(i) Indians lending abroad is recorded in Capital Account of BOP Account because it leads to creation of foreign exchange assets. It is recorded on the debit side because it outflow of foreign exchange. (ii) Lending abroad increases demand for foreign exchange. Supply of foreign exchange remains unchanged, exchange rate may rise.