Important Banking Awareness Topis
Current Account:
Current account is that account, which records imports and exports of goods and services and uni-literal transfers. The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account.
Components of Current Account:
Current Account records the following transactions
- Export and import of goods (or of visible items)
- Export and import of services (or of invisible items)
- Uni-literal transfers from one country to the other.
In the context of current account Balance of Payment following are some important observations:
- All exports are recorded as positive (+) items as these result in the flow of foreign exchange into the country.
- All imports are recorded as negative (-) items as these cause the flow of foreign exchange out of the country.
- Balance occurring on account of export and import of goods is regarded as balance of visible trade.
- Balance occurring on account of export and import of services is recorded as balance of invisible trade.
- Receipts of uni-lateral transfers are recorded as positive items.
- Payments of uni-lateral transfers are recorded as negative items.
Capital Account:
It is that account, which records all such transactions between residents of a country and rest of the world, which causes a change in the asset or liability status of the residents of a country or its government. Investments (FDI and FII) and Borrowings (ECB etc) are part of the capital account.
Foreign Investment:
Foreign investment means a investment into production or business in a country by an individual or company in another country for profit earning. Typically, foreign investment denotes that foreigners take a some what active role in management as a part of their investment. Foreign investment typically works both ways, especially between countries of relatively equal economic stature. Foreign investment on the basis of nature can be categorised into two types
- Foreign Direct Investment (FDI)
- Foreign Portfolio Investment (FPI)
Foreign Institutional Investment (FII):
These are investments by entities from outside the country into the financial assets like debts and shares of companies from a different country, in which they are incorporated. FIIs (Foreign Institutional Investment) are required to register with SEBI (Security and Exchange Board of India) and any foreign individual wanting to invest into India has to come through one of these FIIs.
Participatory Notes(P-Notes):
These are financial instruments used by investors or hedge funds that are not registered with the securities and exchange board of India to invest in Indian securities. India-based brokerages buy notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.
Capital Account Convertibility in India:
Capital account convertibility (CAC) for Indian economy refers to the abolition of all limitations with respect to the movement of capital from India to different countries across the globe. According to the Tarapore Committee, capital account convertibility refers to the freedom to convert local financial assets into foreign financial assets and vice-versa at market determined rates of exchange. It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on or by the rest of the world.
