SMB2F1 1

MBA-0000
International Finance
Block
1
FUNDAMENTALS OF INTERNATIONAL
MANAGEMENT
UNIT 1
Introduction to International Finance 7
UNIT 2
Theories of International Trade 13
UNIT 3
International Trade Finance in India 21
UNIT 4
Balance of Payments 34
Expert Committee
Dr. J. Mahender Reddy Prof. P. A. Kulkarni
Vice Chancellor Vice Chancellor
IFHE (Deemed University), Hyderabad Icfai University, Dehradun
Prof. Y. K. Bhushan Dr. O. P. Gupta

Vice Chancellor Vice Chancellor
Icfai University, Meghalaya Icfai University, Nagaland
Dr. Lata Chakravorty Prof. D. S. Rao

Director Director
IBS Bangalore IBS Hyderabad
Prof. P. Bala Bhaskaran Dr. Dhananjay Keskar

Director Director
IBS Ahmedabad IBS Pune
Prof. P. Ramnath
Director
IBS Chennai
Course Preparation Team
Shri T. S. Rama Krishna Rao Prof. Hilda Amalraj

Icfai University IBS Hyderabad
Ms. Anita Prof. Bratati Ray

Icfai University IBS Kolkata
Ms. C. Padmavathi Dr. Vijaya Lakshmi S

Ms. Sudha Dr. Vunyale Narender

Ms. Sunitha Suresh Prof. Arup Chowdhury

Icfai University IBS Kolkata
© The ICFAI University Press, All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet,
or transmitted in any form or by any means – electronic, mechanical, photocopying or otherwise –
without prior permission in writing from The ICFAI University Press.
Ref. No. IF SLM – 072011R B1
For any clarification regarding this book, the students may please write to The ICFAI University
Press specifying the unit and page number.
While every possible care has been taken in type-setting and printing this book, the ICFAI
University Press welcomes suggestions from students for improvement in future editions.
The ICFAI University Press, Hyderabad

COURSE INTRODUCTION
Of late, the liberalization of economies was predominantly witnessed than ever before
during the last decades of the twentieth century. This change led to the expansion of
inter-country businesses. With an increase in cross-border operations, companies were
to trade with other countries and in different currencies. This prominent international
trade resulted in tremendous expansion of foreign exchange markets in the world. The
role of currency markets in international trade, exchange rate determination, and
forecasting bears good amount of significance before entering an international trade.
This course provides the inputs essential for decision making using the above
information. A fair amount of understanding is essential to identify different types of
exposures a firm is exposed to due to international trade. This course provides a good
overview of managing different exposures. Besides, it helps to know the various
financial instruments available that can be utilized for investing or borrowing from
international financial markets. The applications of centralized and decentralized cash
management techniques are discussed to manage short-term finances in MNCs. A good
amount of content is dedicated to international trade covering – trade blocks, WTO,
GATT, Documentary Credits, Exim Policy, and Export and Import Finance Regulations.
After reading this course, students would be able to comprehend the following topics.
Introduction to International Finance that outlines the increasing interdependence of
economies due to cross border trade. Further, it highlights the integration of financial
markets, costs, and benefits. The evolution of various prominent international trade
theories is also discussed.
The exchange control regulations related to imports and exports in India and the modes
of financing.
Balance of Payments which systematically records the economic transactions of a
country with the rest of the world. The knowledge of the principles of BoP accounting,
factors affecting BoP, and BoP compilation would help the reader understand the
economic situation of any economy.
Exchange Rate System that determines the framework of exchange rate movements
such as fixed, floating or hybrid. Different types of exchange rate systems that have
evolved and that currently are prevailing in various countries give a manager a fair
picture before undertaking any currency hedging.
The structure and mechanics of currency dealing, types of exchange rate quotations,
computation of forward and spot rates in forex markets etc.
Need for exchange rate determination using Purchasing Power Parity, Interest Parity
and Fischer Effect. An elaborate understanding of this will impact a firm's borrowing
and investing decisions. Further, exchange rate forecasting models are also covered.
Due to cross border transactions, firms are exposed to transaction, translation and
operating exposures. Students will get an understanding of the various internal as well
as external techniques to minimize these exposures are discussed in this course.
Foreign Direct Investment which has taken the center stage in today's trade and business
environment. Students will have a clear picture of the growth of foreign direct
investment that is witnessed across the globe due to growing needs of companies.
The Adjusted Present Value (APV) approach which enables to assess the project
internationally, is discussed in detail.
International financial markets facilitate companies to borrow and invest using financial
instruments. This book gives an extensive coverage of various international instruments
available and their features. Besides, short-term financial management strategies of
MNCs – centralization and decentralization, and their advantages and disadvantages are
discussed. The course also covers international accounting and taxation.
In order to facilitate and increase regional trade, a number of trade blocks were formed.
This book will enable the students to understand the formation of trade blocks, cartels,
bilateral and multilateral trades, and their objectives. The significance of Exim Policy,
role of documentary credits, and the export import policy regulations are also covered.
The course contains five blocks.
BLOCK 1 FUNDAMENTALS OF
INTERNATIONAL MANAGEMNET
This is the introductory block to International Finance. It highlights the significance of
international trade in the wake of globalization. With the increase in cross border trade,
companies from different economies trade in various products and services with a
variety of currencies. This block outlines the significance of international trade, various
international trade theories propounded, relevance of trade barriers, financing imports
and exports, and balance of payments.
Unit 1 of this block covers the meaning and implications of globalization. This unit
briefly discusses the reasons for integration of financial markets, the benefits, the costs
involved, and its effects.
Unit 2 outlines some of the fundamental issues that need to be addressed in the context
of international trade. It also gives an outline of the evolution of various international
trade theories. Further, this unit discusses the need for trade barriers, the types of tariff
and non-tariff barriers, and their advantages and limitations.
Unit 3 discusses the role of Export-Import Bank of India in financing international trade
in India. This unit lists the various financing schemes extended to segments like
companies, foreign governments and to Indian banks.
Unit 4 deals with the basic concepts of economic transactions and principles of Balance
of Payments accounting[v1]. Besides, this unit discusses the factors that affect the
components of BoP and the significance of BoP statistics.
UNIT 1 INTRODUCTION TO
INTERNATIONAL FINANCE
Structure
1.1 Introduction
1.2 Objectives
1.3 Need to Study International Finance
1.4 Meaning and Implications of Globalization
1.5 Integration of Financial Markets
1.6 Summary
1.7 Glossary
1.8 Suggested Readings/Reference Material
1.9 Suggested Answers
1.10 Terminal Questions
1.1 INTRODUCTION
A company with global presence has to deal with complex financial management
processes. The process of financial management gets more complicated with
globalization, when the company has its operations across various countries with a
variety of currencies. International trade, involving exchange of goods and services
across international boundaries global financial activities gained a lot of significance.
This changing scenario makes it imperative for a student of finance to study
international finance. The study of exchange rates, foreign investment and their effect
on international trade is popularly known as international finance.
1.2 OBJECTIVES
After going through the unit, you should be able to:
• Understand the importance of International Finance;
• Define the meaning and implications of globalization;
• Identify the need for integration of financial markets; and,
• Recognize the benefits, costs and effects of integration of financial markets.
1.3 NEED TO STUDY INTERNATIONAL FINANCE

Financial management of a company is a complex process, involving its own methods
and procedures. It is made even more complex because of the globalization taking
place, which is making the world’s financial and commodity markets more and more
integrated. The integration is both across countries as well as markets. Not only the
markets, but even the companies are becoming international in their operations and
approach.
When a firm operates only in the domestic market, both for procuring inputs as well as
selling its output, it needs to deal only in the domestic currency. As companies try to
increase their international presence, either by undertaking international trade or by
establishing operations in foreign countries, they start dealing with people and firms in
various nations. Since different countries have different domestic currencies, the
question arises as to which currency should the trade be settled in. The settlement
currency may either be the domestic currency of one of the parties to the trade, or
may be an internationally accepted currency. This gives rise to the problem of dealing
with a number of currencies. The mechanism by which the exchange rate between
these currencies (i.e., the value of one currency in terms of another) is determined,
along with the level and the variability of the exchange rates, can have a profound
effect on the sales, costs and profits of a firm. Globalization of the financial markets
also results in increased opportunities and risks on account of the possibility of overseas
borrowing and investments by the firm. Again, the exchange rates have a great impact
on the various financial decisions and their movements can alter the profitability of
these decisions.
1.4 MEANING AND IMPLICATIONS OF GLOBALIZATION

In this increasingly globalized scenario, companies need to be globally competitive in
order to survive. Knowledge and understanding of different countries’ economies and
their markets is a must for establishing a company as a global player. This knowledge will
help the company to cater to the different needs and demands of customers in the domestic
and international markets. For instance, in the month of January, 2008, the New York
Times commented that the General Electric is doing well in developing countries by
selling air fleets and aiding their infrastructure development. By the time the market cools
overseas, i.e., in developing countries GE predicts that the domestic market i.e., the United
States will be ready to buy again.
Studying international finance helps a finance manager to understand the complexities
of the various economies. It can help him understand as to how the various events
taking place the world over are going to affect the operations of his firm. It also helps
him to identify and exploit opportunities, while preventing the harmful effects of
international events. A thorough understanding of international finance will also assist
the finance manager in anticipating international events and analyzing their possible
effects on his firm. He would thus get a chance to maximize profits from opportunities
and minimize losses from events which are likely to affect his firm’s operations
adversely.
Companies having international operations are not the only ones which need to be
aware of the complexities of international finance. Even companies operating
domestically need to understand the issues involved. Though they may be operating
domestically, some of their inputs (raw materials, machinery, technological know-how,
capital, etc.) may be imported from other countries, thus exposing them to the risks
involved in dealing with foreign currencies. Even if they do not source anything from
outside their own country, they may have foreign companies competing with them in
the domestic market. In order to understand their competitors’ strengths and
weaknesses, awareness and understanding of international events again gains
importance.
What about the companies operating only in the domestic markets, using only
domestically available inputs and neither having, nor expecting to have any foreign
competitors in the foreseeable future? Do they need to understand international finance?
The answer is in the affirmative. Globalization and deregulation have resulted in the
various markets becoming interlinked. Any event occurring in, say Japan, is likely to
8
Introduction to
affect not only the Japanese stock markets, but also the stock markets and money
markets the world over. For example, the forex and money markets in India have
become totally interlinked now. As market players try to profit from the arbitrage
opportunities arising in these markets, the events affecting one market also end up
affecting the other market indirectly. Thus, in case of occurrence of an event which has
a direct effect on the forex markets only, the above mentioned domestic firm would also
feel its indirect effects through the money markets. The same holds good for
international events, thus, the need for studying international finance.
1.5 INTEGRATION OF FINANCIAL MARKETS

Integration of financial markets to an investor means the freedom to invest or raise
funds across various markets in various financial instruments. The advent of
globalization has resulted in quick dissemination, money transfers and reduced
transaction costs. Technology has played a key role in this process. As a result of
financial integration, any factor affecting one market automatically and quickly affects
the rest of the globe. This effect is referred to as the transmission effect. Due to increase
in inflation levels of different countries, the price of various financial assets varied with
regard to change in domestic inflation rates as well as interest rates of various countries.
These developments resulted in the development of new financial instruments, namely,
interest rate swap, currency swap, future contracts, options etc. It also led to
liberalization of various regulations governing the financial markets and helped the
countries in increasing international perspective with regard to different factors which
create an impact on globalization.
Effective integration of financial markets demonstrates better transfer of resources
between surplus units and deficit units. Capital-rich countries experience lower return
on capital compared to capital-poor countries. On the other hand, integration also
involves risks such as currency risk, country risk, market risk and other various risks.
Variation in the value of investment in terms of domestic currency, denoted in other
countries’ currency is known as currency risk. It arises when the investor is unable to
disinvest at will because of a country’s sudden change in attitude towards foreign
investment or any other factor such as war. Increase in volatility is the effect of
globalization and integration of financial markets. Interest rates, exchange rates etc.,
keep changing regularly because of the changes occurring in different segments of
various financial markets in the world.
Self-Assignment Questions
a. Define international finance.
…………………………………………………………………………………..
…………………………………………………………………………………..
…………………………………………………………………………………..
b. Discuss various implications of globalization.
…………………………………………………………………………………..
…………………………………………………………………………………..
…………………………………………………………………………………..
9
1.6 SUMMARY
Happenings in and around the world in the name of globalization are becoming a never
ending process providing lots of opportunities to grow in the arena of international trade
along with various threats which need to be thwarted.
Today all the aspects of international trade can be coolly handled by having a better
understanding of it.
1.7 GLOSSARY
Country Risk is the risk perceived by a non-resident while dealing with a country in a
commercial and/or investment transaction, which arises out of political and economic factors.
Currency Swap is a contract involving exchange of interest payments on a loan in one
currency for fixed or floating interest payments on equivalent loan in a different currency.
Future Contracts is a contract which is exchange traded subjected to losses/gains
arriving out of daily changes in underlying asset such as foreign currencies or
commodities etc.
Globalization is the process of integration of the world community into a common
system – either economical or social.
Interest Rate Swap means an agreement between two or more parties to exchange
interest payments over a specific time period on agreed terms.
International Finance is the study of exchange rates, foreign investment and their
effect on international trade.
International Trade is exchange of goods and services across international boundaries.
Option is a contract in which the seller grants the buyer, the right to purchase from the
seller a designated instrument or an asset at a specific price which is agreed upon at the
time of entering into the contract.
1.8 SUGGESTED READINGS/REFERENCE MATERIAL

• Seth, A.K. International Financial Management.
• Maurice D. Levi. International Finance.
• Francis Cherunilam. International Business Environment.
1.9 SUGGESTED ANSWERS

Self-Assignment Question
a. International finance is a branch of international economics that studies the
dynamics of exchange rates, foreign investment, and how these affect
international trade. Besides, it studies international projects, international
investments and capital flows, and trade deficits. It includes the study of futures,
options and currency swaps
b. Implications of globalization: Globalization has both positive and negative effects.
It has brought new opportunities to developing countries. Greater access to
developed country markets and technology transfer hold out promise improved
productivity and higher living standard.
It has brought new challenges like growing inequality across and within nations.
Any volatility/adversity in one financial market would spread across other
countries quickly. Another negative aspect of globalisation is that a great
majority of developing countries remain away from the process.
10
Introduction to
1.10 TERMINAL QUESTIONS
A. Multiple Choices
1. Which of the following statements is true regarding international finance?
a. Companies having international operation only need to understand
international finance.
b. Foreign companies situated in domestic markets only need to understand
international finance.
c. Domestic companies having stake in foreign companies need to
understand international finance.
d. Foreign companies having stake in domestic companies need to
understand international finance.
e. All the companies need to understand international finance.
2. Which of the following is/are settlement currency between international parties
to trade?
a. Domestic currency of any one of the parties only.
b. US Dollars only.
c. Euro only.
d. Internationally accepted currency only.
e. Both (a) and (d) of the above.
3. Diversification of securities is possible only when which of the following is true?
a. Securities are negatively correlated.
b. Securities are inversely correlated.
c. Securities are perfectly correlated.
d. Securities are perfectly positively correlated.
e. Securities are proportionately correlated.
4. Which of the following implies, ‘integration of financial markets across
geographical boundaries’?
a. Liberalization.
b. Market integration.
c. Globalization.
d. Privatization.
e. None of the above.
5. Globalization led to the development of which of the following financial
instruments?
a. Currency swap.
b. Interest rate swap.
c. Euro-dollar market instruments.
d. Options.
e. All of the above.
11
B. Descriptive
1. Explain the significance of studying international finance.
2. What is integration of markets? Discuss reasons, benefits and costs associated
with integration.
These questions will help you to understand the unit better. These are for your
practice only.
12
UNIT 2 THEORIES OF
INTERNATIONAL TRADE
Structure
2.1 Introduction
2.2 Objectives
2.3 Theory of Absolute Advantage
2.4 Theory of Comparative Advantage
2.5 Heckscher-Ohlin Model
2.6 Imitation-Gap Theory
2.7 International Product Life Cycle Theory
2.8 Developments on the International Trade Front
2.9 Trade Barriers
2.10 Summary
2.11 Glossary
2.1 INTRODUCTION
A well-developed global financial system is essential for supporting increased
international trade. The international payment system, the availability of international
credit and credit guarantees (all forming a part of the international financial system),
form the backbone of international trade. Theories of international trade are significant
as they throw light on certain basic issues of international trade as:
• Why does international trade take place?

• Which countries should participate in the trade?
• Why should a country export or import from a particular country?
Some major theories of international trade are:
i. Theory of Absolute Advantage.
ii. Theory of Comparative Advantage.
iii. Heckscher-Ohlin Model.
iv. Imitation-Gap Theory.
v. International Product Life Cycle Theory.
2.2 OBJECTIVES
• Identify the significance of international trade theories;
• Understand the major theories propounded in international trade;
• Explain the developments on the international trade front; and
• Recognize various forms of trade barriers in international trade.
2.3 THEORY OF ABSOLUTE ADVANTAGE

Adam Smith proposed the Theory of Absolute Advantage was proposed by Adam
Smith in 1776. According to this theory, international trade occurs because of ‘benefit
of specialization’ between any two countries. Where each country is comfortable and
more efficient in producing a particular good than the other, there is an incentive to
trade. Both the countries can gain from specialization, which in turn enhances the
productivity. So countries trade in goods they specialize in and thus benefit paving the
way to greater productivity. Let us consider two countries, Saintland and Starsburg.
Saintland can produce a television using 15 units of labor and Starsburg can produce
bikes using 20 units of labor. Conversely, Saintland needs 30 units of labor to produce
one electronic bike and Starsburg needs 25 units of labor to produce one digital
television. In other words, Saintland enjoys an absolute advantage in producing
televisions and Starburg in producing bikes. The remaining factors are used in the same
proportion by both the countries. These specialized goods will be traded between them.
So, Saintland using 15 units will produce a television, exchange it for one bike and use
the remaining 15 units to produce a television for its own use. In this way Saintland
experiences the satisfaction of using both television and a bike. Such a trade results in
proper utilization of resources between countries leading to higher productivity.
Limitations
i. This theory elucidates causes of international trade only when the trading
countries have absolute advantage in producing at least one product.
ii. This theory works on the assumption that transportation costs involved in the trade
are not important in comparison to degree of comparative advantage.
iii. This theory believes in stability of exchange rates.
2.4 THEORY OF COMPARATIVE ADVANTAGE

David Ricardo proposed the Theory of Comparative Advantage in 1817. According to
this theory, two countries can gain in trade, when one of them has an absolute advantage
in producing at least one good. Here comparative advantage implies lesser opportunity
cost in producing a commodity. For example, let us assume that US and Japan are
efficient in producing iron and copper as shown in Table 1.
Labor-hours required
1 unit of Product A 1 unit of Product B
US 10 20
Japan 20 25
Table 1
US enjoys absolute advantage in producing Product A as well as Product B, as the
number of labor hours needed to produce one unit of each commodity is lesser than that
required by Japan. Let us further consider that 500 units of labor-hours are available.
These 500 units can be used in producing either Product A or Product B. If US uses
these units for producing only Product A, then it will be able to produce 50 (500/10)
units of Product A. But, if it produces only Product B, it can produce 25 (500/20) units
14
Theories of International Trade
of Product B. In the same way, Japan can produce 25 units of Product A and 20 units of
Product B. To produce each unit of Product A, certain number of units of Product B has
to be foregone and vice-versa. This quantity of Product B foregone to produce an
additional unit of Product A is called opportunity cost. As US can produce either 50
units of Product A or 25 units of Product B with available resources, the opportunity
cost of Product A for US would be 0.5 (25/50) and for Product B, it would be 2 (50/25).
Similarly, for Japan the opportunity cost for producing one unit of Product A would be
0.8 and for Product B, it would be 1.25. So, US has lower opportunity cost for Product
A and thus enjoys comparative advantage in producing Product A, while Japan enjoys
the same advantage in producing Product B. This theory of comparative advantage is
based on certain implicit assumptions such as perfect competition with flexible prices
and wages in both the countries, constant marginal product of labor in both the
countries, full employment in the countries, free mobility of labor between countries
and no technological innovation in any of the economies. Comparative advantage theory
is widely used across nations.
Limitations
i. This theory does not hold good when the economy suffers from recession or
malfunctions.
ii. Assumptions of perfect competition and absence of any technological innovation
are inflexible.
iii. This theory suffers from the same drawbacks as absolute advantage theory.
2.5 HECKSCHER-OHLIN MODEL

Eli Heckscher and Bertil Ohlin developed this model in the 1920s considering two types
of products, namely, labor intensive and capital intensive. According to this model, a
labor-rich country producing labor-intensive goods trades with a capital-rich country
producing capital intensive goods and can enjoy the benefits of international trade. This
theory is based on assumptions such as constant or decreasing returns to scale, same level
of technology in both the countries leading to same level of efficiency, labor and capital
are perfectly immobile for inter-country transfers and perfectly mobile for inter-sector
transfers, commodity and factor markets are perfectly competitive and there are no
obstructions to trade.
Limitations
i. This theory considers given factor endowments which can actually be innovated.
ii. The assumption of a labor-rich country producing labor-intensive products and a
capital-rich country producing capital-rich goods is not always correct due to
minimum wage laws prevalent in some countries.
2.6 IMITATION-GAP THEORY

According to this theory proposed by Posner, two countries having similar factor
endowments and consumer tastes prefer to trade. This could be due to continuous
inventions and innovations of products that replace the existing ones. The degree of this
trade depends on the variance between the demand lag and imitation lag. The time gap
between the launch of a new or improved product in the country and its demand by
consumers in another country is called demand lag. Similarly, if the difference in time is
15
because of launch of product in one country and its production in another country by the
producers of that country, it is called imitation lag. When imitation lag is shorter than
demand lag, no trade exists between the countries. When the demand lag is shorter than
the imitation lag, then the country which has brought out the innovation will start
exporting to another country as the consumers of that country come to know of their
product and consequently exports will increase. These exports increase till (close of
demand lag) all the consumers of that country become aware of the product. In case the
local producers of the importing country start producing the same product then they can
reduce imports into their country. When imitation lag comes to an end, the trade
declines and is finally eliminated.
2.7 INTERNATIONAL PRODUCT LIFE CYCLE THEORY

Vernon explained the various stages of international product life cycle in international
trade. This process considers technological innovation and market structure as two
important factors. This theory is based on the following principles:
• New products are developed as a result of technological innovations.
• Trade patterns are determined by the market structure and the phase in a new
product’s life.
According to this theory rich and developed countries concentrate on innovations. The
new product is initially produced and exported by the country which has innovated. In the
next stage the production of this new product shifts to other developed countries giving
rise to cost advantage. In the last stage the production shifts to very less developed
countries. This ultimately leads to change – the earlier exporting countries would now
prefer to import due to cost efficiency.
Self-Assignment Questions – 1
a. Explain in brief the significance of comparative advantage theory.
…………………………………………………………………………………..
…………………………………………………………………………………..
…………………………………………………………………………………..
b. Define ‘demand lag’ and ‘imitation lag’.
…………………………………………………………………………………..
…………………………………………………………………………………..
…………………………………………………………………………………..
2.8 DEVELOPMENTS ON THE INTERNATIONAL TRADE FRONT

Intra-Industry Trade
When a particular country exports and imports simultaneously the same product, it is
known as intra-industry trade. This trade is promoted by various reasons like
transportation costs involved in trade, seasonal differences and product differences.
16
Other factors effecting international trade include high re-entry costs, economies of
scale, currency value, consumer tastes and imperfect competition.
Growth of International Trade
Trade between nations requires countries to specialize in a particular product and this in
turn leads to proper allocation and utilization of world resources. Benefits to producers
and customers by way of specialization, economies of scale and wide range of products
to choose from has led to the growth of international trade.
Risks Involved in International Trade
International trade involves additional risks, namely, exchange risk and country risk.
Exchange risk arises because of uncertainty in return due to unexpected changes in
exchange rates. Similarly, country risk arises when an exporter does not receive his
payment from the importer because of country specific reasons.
2.9 TRADE BARRIERS

To discourage imports, governments put up trade barriers. Trade barriers can be tariff or
non-tariff barriers.
Tariff Barriers
When tax is levied on internationally traded goods, it is known as tariff. If it is collected

on imported goods it is called import duty and tariff on exported goods is called export
duty. Tariff can be either specific duty, ad valorem duty or a compound duty. Tariff
barriers include technical barriers, procurement policies, international price fixing,
exchange controls, direct and indirect restrictions on foreign investments, customs
valuation and transportation costs.
Non-tariff Barriers
All rules, regulations and bureaucratic delays in restricting foreign goods from entering
into domestic markets are known as non-tariff barriers. They include quotas, embargo,
voluntary export restraint, subsidies to local goods and local content requirement.
Reasons for Imposition of Trade Barriers
• It is a source of revenue to the government.
• Sometimes trade barriers are imposed by the government keeping in view the
economic welfare of the nation.
• It improves the economic condition of the country.
• It results in free trade implications.
• It protects the domestic industry that has great growth potential.
• It acts as a retaliator for other countries imposing trade barriers.
• It reduces expenditure in foreign currency by the citizen, to improve balance of

payment situation.
17
Costs of Trade Barriers
Trade barriers affect the economy in three ways:
• Increase in cost of foreign goods and shift in domestic demand towards

domestically produced goods.
• Due to higher price consumers consume less of that particular good.
• Tariff generates revenue for the government.
The first two affects involve economic cost and the third does not involve any economic
cost.
a. Elucidate in brief risks in international trade.
…………………………………………………………………………………..
…………………………………………………………………………………..
…………………………………………………………………………………..
b. Discuss tariff barriers vs. non-tariff barriers.
…………………………………………………………………………………..
…………………………………………………………………………………..
…………………………………………………………………………………..
2.10 SUMMARY
Theories of international trade help understand certain basic issues of international trade
which is developing at a rapid pace. Major theories of international trade are Theory of
Absolute Advantage, Theory of Comparative Advantage, Heckscher-Ohlin Model,
Imitation-Gap Theory, and International Product Life Cycle Theory.
Simultaneous export and import of a product by a particular country is called intra-

industry trade.
Additional risks involved in international trade are exchange risk, and country risk.
Trade barriers are of two types, namely tariff, and non-tariff barriers. When tax is levied
on goods in international trade, it is known as tariff and includes exchange controls,
customs valuation procurement policies etc. Any rules, regulations and bureaucratic
delays in restricting the flow of foreign goods into domestic markets are included under
the head, non-tariff barriers such as quotas, embargo etc.
Trade barriers are imposed on account of various reasons such as to improve economic
conditions of the country, enhance economic welfare, and to attain national goals etc.
18
2.11 GLOSSARY
Embargo is a complete ban of imports from a specific country.
Quota means a limit on the number of units to be imported or a market share to be held
by foreign producers.
Tariff is the tax levied on goods in international trade.

• Machiraju, H.R. International Financial Management.

a. The theory of comparative advantage explains - how a trade can create value for
both parties even when one can produce all goods with fewer resources than the
other. The net benefits of such an outcome are called gains from trade.
b. The degree of the trade depends on the variance between the demand lag and
imitation lag. The time gap between the launch of a new or improved product in
the country and its demand by consumers in another country is called demand
lag. Similarly, if the difference in time is because of launch of product in one
country and its production in another country by the producers of that country, it
is called imitation lag. When imitation lag is shorter than demand lag, no trade
exists between the countries. When the demand lag is shorter than the imitation
lag, then the country which has brought out the innovation will start exporting to
another country as the consumers of that country come to know of their product
and consequently exports will increase. These exports increase till (close of
demand lag) all the consumers of that country become aware of the product. In
case the local producers of the importing country start producing the same
product then they can reduce imports into their country. When imitation lag
comes to an end, the trade declines and is finally eliminated.
a. International trade involves additional risks, namely, exchange risk and country
risk. Exchange risk arises because of uncertainty in return due to unexpected
changes in exchange rates. Similarly, country risk arises when an exporter does
not receive his payment from the importer because of country specific reasons.
b. Tariff Barriers When tax is levied on internationally traded goods, it is known
as tariff. If it is collected on imported goods it is called import duty and tariff on
exported goods is called export duty. Tariff can be either specific duty, ad
valorem duty or a compound duty. Tariff barriers include technical barriers,
procurement policies, international price fixing, exchange controls, direct and
indirect restrictions on foreign investments, customs valuation and transportation
costs.
Non-tariff Barriers: All rules, regulations and bureaucratic delays in restricting
foreign goods from entering into domestic markets are known as non-tariff
barriers. They include quotas, embargo, voluntary export restraint, subsidies to
local goods and local content requirement.
19
A. Multiple Choices
1. Who amongst the following proposed the Imitation-gap theory?
a. Bertil Ohlin.
b. David Ricardo.
c. Vernon.
d. Posner.
e. Adam Smith.
2. Which of the following is not an assumption made by David Ricardo?
a. Productivity of labor.
b. Partial employment.
c. Perfect competition.
d. Mobility.
e. Technology.
3. Which of the following duties is levied on goods taken out of the country?
a. Import duty.
b. Foreign duty.
c. Export duty.
d. Specific duty.
e. Compound duty.
4. Duty drawback allowed for exported goods is an example of ____________
a. Quota
b. Tariff
c. Embargo
d. Subsidy
e. Export Restraint.
5. Which of the following theories of International Trade explains the trade
between two countries having similar factor endowments and consumer tastes?
a. Theory of absolute advantage
b. Theory of comparative advantage
c. Heckscher-Ohlin model
d. Imitation-Gap theory
e. International product life cycle theory.
B. Descriptive
1. Explain the various theories of international trade in detail.
2. What is intra-industry trade? Mention the reasons that have contributed to its
popularity.
3. What are Non-Tariff Barriers? Discuss different types of NTBs.
4. ‘Tariffs are sources of revenue to the government’. Explain.
practice only.
20
UNIT 3 INTERNATIONAL TRADE
FINANCE IN INDIA
Structure
3.1 Introduction
3.2 Objectives
3.3 The Role of Exim Bank of India in Trade Finance
3.3.1 Lending
3.3.2 Lending to Indian Companies
3.3.3 Lending to Foreign Governments and Foreign Companies
3.3.4 Lending to Indian Banks
3.4 Global Trade Finance Limited
3.5 Exchange Control Regulations Related to Merchant Transactions
3.6 Summary
3.7 Glossary
3.1 INTRODUCTION
International trade finance comprises various aspects related to international trade
finance[v1]. Export-Import Bank of India (EXIM Bank), one of the top financial
institutions in the country, was set up to promote and finance international trade.
3.2 OBJECTIVES
• Understand the role of EXIM Bank in trade finance; and
• Know the exchange control regulations related to merchant transaction.
3.3 THE ROLE OF EXIM BANK OF INDIA IN TRADE FINANCE

The Export-Import (EXIM) Bank was set up to finance and promote foreign trade. The
EXIM Bank extends finance to exporters of capital and manufactured goods, exporters
of software and consultancy services and to overseas joint ventures and
turnkey/construction projects. Term loans are also extended to projects located in export
zones.
EXIM bank financing can, if required, supplement working capital finance extended by
commercial banks at pre-shipment stage. The functions of the EXIM bank are lending,
guaranteeing, promotional services and advisory services.
3.3.1 Lending
To Indian Companies To Foreign Govt., To Indian Banks
Foreign Companies
1. Direct Assistance 1. Buyers’ Credit 1. Bill Rediscounting

2. Consultancy and 2. Lines of Credit 2. Refinance
Technology Services
3. Overseas Investment 3. Relending Facility
Finance
4. Pre-shipment Credit
5. Deemed Exports
6. 100% Export Oriented
Units and Free Trade
Zones
7. Forfaiting
3.3.2 Lending to Indian Companies

Direct Assistance
Funds are provided on deferred payment terms to Indian exporters of plant, equipment
and related services, which enable them to extend deferred credit to the overseas buyer.
Credit is provided by EXIM bank in participation with commercial banks. Banks
provide the credit and they can avail of refinance from the EXIM bank. The exporter is
expected to obtain an advance and a down payment of at least 15 percent of the contract
value.
Consultancy and Technology Services
Indian companies executing overseas contract involving consultancy and technology
services, can avail of EXIM’s financing program, to offer deferred payment terms to
their clients. The credit may be extended to the Indian company either by EXIM bank in
participation with commercial banks, or directly by commercial banks who could in turn
seek refinance from EXIM bank. The Indian company in turn would offer deferred
payment terms to their clients.
The credit normally given in Indian rupees is repayable in half-yearly installments over
a period not exceeding five years. Guarantee of foreign government or a
guarantee/irrevocable LC of an acceptable bank would need to be obtained. The Indian
company also has to obtain ECGC insurance cover and assign it in favor of the bank.
Overseas Investment Finance
The EXIM bank provides export credits to Indian promoters for their equity
contribution to overseas joint ventures. The funds are in the form of long-term credit not
exceeding ten years. EXIM bank’s finance will be made available to Indian promoters
by way of,
i. Rupee term loans for financing equity contribution.
ii. Foreign currency loans/guarantees, where the equity contribution is allowed by
the Government of India out of foreign currency loan to be raised by the Indian
promoter.
22
International Trade
Finance in India
Equity contribution by Indian promoters can be in various forms such as:
a. Capitalization of proceeds of exports in the form of plant and machinery.
b. Technical know-how.
c. Capitalization of earnings such as royalty and management fees.
d. Cash remittances.
Where cash remittances are allowed, Indian promoters are granted approvals to remit
foreign exchange from India or raise foreign currency loans for the purpose of equity
contribution.
The quantum of finance will be determined with reference to the Indian promoters’
share in the equity structure of overseas joint ventures, subject to a maximum of 80
percent of the Indian promoters’ equity contribution. Commercial banks may also opt to
take up risk participation in term loans and guarantees extended by EXIM bank.
Pre-shipment Credit
If the requirement of pre-shipment credit by exporters is for periods in excess of 180
days, EXIM bank participates in the credit.
Financing Deemed Exports
Deemed exports occur in case of specified transactions within India, which result in
foreign exchange earnings or savings as given below:
i. Supplies made in India to World Bank/IDA-aided projects against international

competitive bidding.
ii. Supplies to free-trade zones/100 percent export oriented units.
iii. Sales to foreign shipping companies.
iv. Supplies to ONGC and Oil India Ltd., for offshore and onshore drilling
operations.
Deemed exports can avail of EXIM bank’s deferred credit facility. EXIM bank may
participate with commercial banks in extending rupee loans for bridging cash flow
deficits of projects/supply contracts; EXIM bank also issues guarantees and provides
bridge finance in foreign currency.
Capital and producer goods are eligible for medium-term credits. Long-term credits up
to ten years are provided in exceptional cases. Credit is normally secured by a bank
guarantee.
Assistance to Export-Oriented Units

Free-trade zones and export-oriented units are given finance for acquisition of land,
building, plant and machinery, preliminary and pre-operative expenses and working
capital (as margin money). EXIM bank’s assistance will be in the form of direct
assistance given as rupee term loans or deferred payment guarantees or indirect
assistance as refinance to commercial banks.
The export-oriented units seeking EXIM’s finance will have to establish the technical,
economic and financial feasibility of their projects.
23
Forfaiting
Forfaiting is a common form of financing export related receivables. It is similar to Bill

Rediscounting Scheme. EXIM Bank has introduced this scheme for the Indian
exporters. Under this scheme, the exporter after finalization of the sale (or contract) with a
prospective buyer furnishes all the necessary details regarding the contract to the EXIM
Bank through which a contract of forfaiting is finalized by the exporter with the
overseas forfaiting agency. The exporters draw a series of bills of exchange on the
overseas buyers’ which will be sent along with the shipping documents to the buyer’s
bank for overseas buyers’ acceptance. Overseas buyers’ bankers will hand over to the
exporter the documents against the acceptance of the buyer and signature of ‘aval’ or the
guaranteeing bank. The exporter will submit to his bank to be forwarded to EXIM Bank
which passes the documents to the forfaiting agency. Proceeds of the bills are passed
from the overseas forfaiting agency to the exporter through the EXIM Bank. From October
1997, the authorized dealers are allowed to undertake forfaiting of medium-term export
receivables.
Figure 1: A Flow Chart of a Forfaiting Transaction

1. Commercial contract between the foreign buyer and the Indian exporter.
2. Commitment to forfait bills of exchange/promissory notes (debt instruments).
3. Delivery of goods by the Indian exporter to the foreign buyer.
4. Delivery of debt instruments.
5. Endorsement of debt instruments without recourse in favor of the forfaiter.
24
International Trade
Finance in India
6. Cash payment of discounted debt instruments.
7. Presentation of debt instruments on maturity.
8. Payment of debt instruments on maturity.
Self Assessment Questions – 1
a. What is overseas investment finance by EXIM Bank?

……….……………………………………………………………………
……….……………………………………………………………………
……….……………………………………………………………………
b. Discuss steps in a forfaiting transaction.
……….……………………………………………………………………
……….……………………………………………………………………
……….……………………………………………………………………
3.3.3 Lending to Foreign Governments and Foreign

Companies
Buyers’ Credit
Credit is given to buyers abroad to enable them to import engineering goods from India
on deferred payment terms. The loan facility is to be secured by a letter of credit or a
bank guarantee.
Lines of Credit
EXIM bank also extends lines of credit to overseas governments or agencies nominated
by them, to enable buyers in these countries to import capital/engineering goods from
India on deferred payment terms. The exporters can obtain payment from EXIM bank
against negotiation of shipping documents.
Relending
An overseas bank can enter into a credit line agreement with EXIM bank. The overseas
bank would relend the funds to importers of capital goods, consumer durables and
services from India. The borrowing bank may be a commercial bank, a central bank, an
investment/merchant bank with a good credit standing.
Figure 2: Specimen Copy of a Promissory Note

25
Figure 3: Specimen Copy of a Bill of Exchange

Loans will be denominated in US dollars and repayment will also be in the same
currency. Short-term loans extending from 180 days to one year are repayable by
quarterly/half-yearly installments. Medium-term loans are also given.
The relending facility will operate as follows:
a. The borrowing bank, upon its approval of a sub-loan to an importer, opens
irrevocable letters of credit in favor of the Indian exporter through EXIM bank or
banks designated by the latter.
b. The Indian exporter ships goods and presents shipping documents to EXIM bank
or banks designated by the latter.
c. EXIM bank pays to the Indian exporter the rupee equivalent.
d. EXIM bank or the negotiating bank in India forwards shipping documents to the
borrowing bank, together with the advice of having made disbursement to the
supplier.
3.3.4 Lending to Indian Banks
Rediscounting of Export Bills
Commercial banks that are authorized dealers can rediscount their short-term usance
export bills with EXIM bank.
Refinance for Deferred Payment Exports
Deferred payment exports arise when export proceeds are to be received after six
months from the date of shipment. EXIM bank offers hundred percent refinance facility
to banks, which enables a bank to extend deferred credit to an Indian exporter against
supplier’s credit offered by the exporter to the overseas buyer. Capital goods, consumer
durables and industrial manufactures can be considered for deferred credit.
GUARANTEES
Overseas Construction Projects
Guarantees are issued by the EXIM bank on behalf of exports of turnkey projects and
construction contracts. Such guarantees include:
i. Bid bond guarantee.
ii. Advance payment guarantee.
26
International Trade
Finance in India
iii. Performance guarantee.
iv. Retention money guarantee.
v. Guarantee for borrowing abroad.
Bid bond guarantee is issued for a maximum period of six months. For advance payment
guarantee, exporters are expected to secure mobilization advance of 10-20 percent of
contract value. Performance guarantee for 5 to 10 percent of contract is issued and is valid
up to one year after completion of the contract. Guarantee for release of retention money
enables the exporter to obtain the release of full payments.
Bridge finance may be needed at the earlier phases of the contract. Up to 10 percent of the
contract value may be raised in foreign currency from a foreign bank against the EXIM
bank’s guarantee for borrowing abroad.
Syndication of Export Credit Risks
EXIM bank and other banks participating in the funding of a loan would syndicate the
respective credit risks to other eligible commercial banks, who would assume part of the
total risk. Proposals valued at more than Rs.1 crore, entailing deferred credit exports of
engineering goods and services, are forwarded by the sponsoring bank for consideration
by an inter-institutional working group which meets at Mumbai, with EXIM bank as the
focal point. While clearing the proposal, the participation arrangement for the funding
of export credit is also determined.
Software Exports
The new policy of the government on computer software exports and development has
rationalized the system of facilities and incentives for exports. Under the new policy,
EXIM bank has been designated as an agency for facilitating speedy clearances and
meeting foreign exchange requirements towards imports for computer software export
where export obligation of 350 percent of foreign exchange used is undertaken. EXIM
bank will undertake financial and technical analysis of Software export proposals and
monitor the progress.
EXIM bank extends advisory services to exporters in several areas and undertakes
promotional activities like techno-economic surveys collecting and disseminating
market information.
EXIM bank offers an integrated package covering foreign currency and rupee term
finance for acquisition of imported and indigenous computer/computer-based systems
for export purposes. EXIM bank welcomes the association of commercial banks for
providing working capital finance for software export projects assisted by it. A rebate of
50 percent on customs duty payable on import of computer system is available to
software exporters opting for 350 percent export obligation.
Export and import transactions are governed by the EXIM policy and the RBI exchange
control regulations. While the EXIM policy regulates the movements of goods and
services by prescribing the permissible exports and imports, the RBI regulations
regulate the corresponding payments for these international transactions. While
extending credit for any such trade, the banks need to make sure that the respective
guidelines have been followed by the concerned parties.
27
3.4 GLOBAL TRADE FINANCE LIMITED
Global Trade Finance Limited (GTF) provides international factoring, import factoring,
domestic factoring, and forfaiting services in India. GTF is a member of Factors Chain
International (FCI), a global association of international factoring companies established
in 1968. FCI played a major role in bringing factoring into most countries and today it
has a membership of 216 factoring companies operating in 62 countries. GTF
commenced its operations in India in September 2001. It was established as a joint
venture promoted by EXIM Bank; West LB, Germany; and IFC, Washington (the
private sector arm of World Bank). GTF is managed by an independent ‘Board’ of 7
Directors. It has received Authorized Dealer status (to conduct Foreign Currency
operations in India) from RBI, in addition they are conducting factoring by forfaiting to
support exporters and importers. The Head Quarters of GTF is located at Mumbai and
its six regional offices are at New Delhi, Bangalore, Chennai, Hyderabad, Ahmedabad,
and Kolkata. The aim of GTF is to be the premier export and import solution provider in
India offering professional quality services on an e-commerce platform. According to
GTF, international trade on the basis of LC’s is gradually becoming extinct. “Open
Account”1 and “Extended Credit”2 is becoming a pre-requisite for increasing sales volume
in global market. Hence, GTF is helping with its export factoring product that provides
credit assessment, credit protection, financing and collection services to exporters for
regular sales on open account terms. The products and services offered by GTF can be
classified as follows:
Products
• Export
– International Factoring
– Forfaiting
• Domestic
– Domestic Factoring
– Channel Financing
• Import Factoring
• Other products
– LC Discounting (Export/Domestic)
– Reverse Factoring or Purchase Bill Discounting.
Services
• Finance
• Credit Protection
• Collection Service
• Professional Sales Ledges Management of Analysis.
1 Payment of international trade transactions can be made on an “Open Account”. The seller
ships the goods and forwards the documents directly to the buyer. The buyer clears the goods
upon arrival and arranges for payment either by bank draft or SWIFT transfer. Society for
Worldwide Interbank Financial Telecommunications is a computerized method by which
banks all over the World are corresponding in a secure and standardized way.
2 Extended credit refers to credit extended by exporters to importers (i.e., Supplier Credit) or
Medium to Long-Term (MLT) loans made by banks (or EXIM Banks), used to finance projects
and capital goods exports (i.e., buyer credit).
28
International Trade
Finance in India
3.5 EXCHANGE CONTROL REGULATIONS RELATED TO
MERCHANT TRANSACTIONS
Exchange controls were introduced in India in 1939, during the World War II, to
conserve foreign exchange, particularly the US dollar, for meeting essential defence
expenditure. The main purpose of exchange controls is to conserve foreign exchange
and ensure its effective utilization.
After the World War II, the exchange control regulations framed under the Defence of
India Rules were replaced by the Foreign Exchange Regulation Act, 1947, which was
revised and replaced by the Foreign Exchange Regulation Act, 1973. With a view to
create conducive climate for attracting foreign direct investment to increase production
and promote exports, FERA 1973, has been substantially amended by FERA
[Amendment] Act, 1993. FERA was replaced with Foreign Exchange Management Act
(FEMA), 1999 to consolidate and amend the law relating to foreign exchange with the
objective of facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market in India.
Exchange controls also cover foreign capital and activities financed by it. The
administrative authority of foreign exchange regulation is vested with the Reserve Bank
of India (RBI) and the routine work of exchange control is delegated to banks
authorized to deal in foreign exchange. Exchange controls and procedures are set out in
the Exchange Control Manual published by the RBI.
Transactions Subject to Control
a. Purchase, sale, and other dealings in foreign exchange and maintenance of
balance at foreign centers.
b. Realization of export proceeds and payment for imports.
c. Payments to non-residents or to their accounts in India.
d. Transfer of securities between residents and non-residents and acquisition and
holding of foreign securities.
e. Foreign travel with foreign exchange.
f. Export and import of currency, cheques, travellers cheques, securities, etc.
g. Activities in India of foreign nationals and branches of foreign firms and
companies.
h. Foreign direct investment and portfolio investment in India including investment
by non-resident Indians, persons of Indian origin and corporate bodies
predominantly owned by such persons.
i. Appointment of non-residents and foreign nationals and foreign companies, etc.,
as agents in India.
j. Setting up of joint ventures/subsidiaries outside India by Indian companies.
k. Acquisition, holding and disposal of immovable property in India by foreign
nationals/companies.
Acquisition, holding and disposal of immovable property outside India by residents in
India.
29
Self-Assessment Questions – 2
a. What is a guarantee? Mention different guarantees issued by Exim bank.
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
b. Define Exchange control.
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
3.6 SUMMARY
The Exim Bank was set-up to finance and promote foreign trade.
It extends finance to exporters of capital and manufactured goods, exporters of software
and consultancy services, and to overseas joint ventures and turn-key/construction
projects abroad.
Exim Bank precisely lends to the Indian companies, Indian banks, Foreign
governments, and Foreign companies.
Exim Bank also issues various guarantees.
GTF was set to provide international factoring, domestic factoring, and forfeiting
services under one roof in India.
Certain regulations are issued by the RBI for exporters.
The Exim Bank, wholly owned by Government of India, was established to provide
financial assistance to promote Foreign Trade.
It provides financial assistance to promote Indian exports through direct financial
assistance, overseas investment finance, term finance for export production and export
development, pre-shipping credit, buyer’s credit, lines of credit, relending facility,
export bills rediscounting, refinance to commercial banks.
Functions of Exim Bank include lending, guaranteeing, promoting and advisory
services.
3.7 GLOSSARY
Bid Bond Guarantee is a guarantee issued by the EXIM Bank for a maximum period
of 6 months.
Free Trade Zone is an area designated by the government of a country to which goods
may be imported for processing and subsequent export on duty-free basis.
Letter of Credit is an arrangement by means of which an issuing bank, acting at the
request of an applicant, undertakes to pay a third party a predetermined amount at a
given date according to agreed stipulations and against stipulated documents.
Performance Guarantee is issued by the EXIM Bank for 5 to 10 percent contract.
30
International Trade
Finance in India
• Francis Cherunilam. International Business Environment.

a. The EXIM bank provides export credits to Indian promoters for their equity
contribution to overseas joint ventures. The funds are in the form of long-term
credit not exceeding ten years. EXIM bank’s finance will be made available to
Indian promoters by way of
i. Rupee term loans for financing equity contribution.
ii. Foreign currency loans/guarantees, where the equity contribution is
allowed by the Government of India out of foreign currency loan to be
raised by the Indian promoter.
b. Forfaiting is a common form of financing export related receivables. It is similar
to Bill Rediscounting Scheme. EXIM Bank has introduced this scheme for the
Indian exporters. The following are the steps in forfeiting:
1. Commercial contract between the foreign buyer and the Indian exporter.
2. Commitment to forfait bills of exchange/promissory notes (debt
instruments).
3. Delivery of goods by the Indian exporter to the foreign buyer.
4. Delivery of debt instruments.
5. Endorsement of debt instruments without recourse in favor of the
forfaiter.
6. Cash payment of discounted debt instruments.
7. Presentation of debt instruments on maturity.
8. Payment of debt instruments on maturity.
a. An non-cancellable indemnity bond that is backed by an guarantor in order to
guarantee investors that principal and interest payments will be made.
Guarantees are issued by the EXIM bank on behalf of exports of turnkey projects
and construction contracts. Such guarantees include:
i. Bid bond guarantee
ii. Advance payment guarantee
iii. Performance guarantee
iv. Retention money guarantee and
v. Guarantee for borrowing abroad.
b. Exchange controls were introduced in India in 1939, during the World War II, to
conserve foreign exchange, particularly the US dollar, for meeting essential
defence expenditure. The main purpose of exchange controls is to conserve
foreign exchange and ensure its effective utilization.
31
Exchange controls also cover foreign capital and activities financed by it.
The administrative authority of foreign exchange regulation is vested with
the Reserve Bank of India (RBI) and the routine work of exchange control
is delegated to banks authorized to deal in foreign exchange. Exchange
controls and procedures are set out in the Exchange Control Manual
published by the RBI.

A. Multiple Choices
1. Exim Bank provides term loans to projects located in which of the following
zones?
a. Trade zones.
b. Free trade zones.
c. Import zones.
d. Export zones.
e. Special zones.
2. Credit given to overseas buyers to import engineering goods from India on

deferred payment terms is known as ___________________.
a. Overseas credit
b. Import credit
c. Letter of credit
d. Buyer’s credit
e. Lines of credit.
3. Which of the following is not a guarantee issued by EXIM Bank?
a. Bid bond guarantee.
b. Post payment guarantee.
c. Retention money guarantee.
d. Performance guarantee.
e. Guarantee for borrowing abroad.
4. To avail EXIM bank finance Export-oriented units should establish which of the
following regarding their projects?
a. Technical Feasibility.
b. Economic Feasibility.
c. Financial Feasibility.
d. All of the above.
e. None of the above.
32
International Trade
Finance in India
5. Supplies to ONGC and Oil India Ltd are included under which of the following
exports?
a. Regular Exports.
b. Normal Exports.
c. Deemed Exports.
d. Exceptional Exports.
e. Specific Exports.
B. Descriptive
1. Explain the functions of Exim Bank in international trade finance.
2. Explain the process of forfaiting in detail.
practice only.
33
UNIT 4 BALANCE OF PAYMENTS
Structure
4.1 Introduction
4.2 Objectives
4.3 Concepts of Economic Transaction, Resident and Non-resident Entities
4.4 Principles for Valuation of Transactions
4.5 Principles of BoP Accounting
4.6 Balance of Payments
4.7 Factors Affecting the Components of BoP Account
4.8 Balance of Payments Compilation
4.9 Balance of Payments Accounts – Indian Perspective
4.10 Importance of BoP Statistics
4.11 Limitations of Balance of Payments
4.12 Relationship between BoP Variables and Other Economic Variables
4.13 Summary
4.14 Glossary
4.1 INTRODUCTION
Every country participating in international trade records its international transactions in
an account called Balance of Payments (BoP) account. International transactions
include all payments made by the country for its imports, gifts and investments abroad
and payments received for exports, gifts and investments by foreigners. Balance of
Payments account aims to maintain a systematic record of all economic transactions
between the home country and the Rest of the World (ROW) for a specific period of
time which is usually a year. Thus, BoP can be defined as ‘a systematic accounting
record of all economic transactions during a given period of time between residents of a
country and foreign countries or non-residents of a country.’
4.2 OBJECTIVES
After going through this unit, you should be able to:
• Understand the concept of economic transactions;
• Know the principles of BoP accounting;
• Recognize the balance of payments factors affecting the components of BoP
account;
• Do BoP compilation;
• Understand BoP account – The Indian perspective;
• Comprehend the importance and limitations of BoP; and
• Value the relationship between BoP variables and other economic variables.
Balance of Payments
4.3 CONCEPTS OF ECONOMIC TRANSACTION, RESIDENT AND
NON-RESIDENT ENTITIES
Economic transaction involves exchange of economic value from residents of one
country with the residents of another country. Exchange of economic value may take
place through purchase or sale of goods and services for cash, exchange of financial
items such as purchase of foreign securities through cash or cheque, a barter transaction
and a unilateral gift in kind or financial gift. For this purpose an individual, government,
non-profit organization or any enterprise whose primary residence is in the given
country is said to be a resident of that country. A company’s foreign subsidiary is
treated as a resident of that foreign economy in which it is incorporated and is carrying
on operations. International organizations such as World Bank and International
Monetary Fund (IMF) are not treated as residents by any nation. All the individuals
and entities other than those who are eligible for resident category are called
‘non-residents’.
4.4 PRINCIPLES FOR VALUATION OF TRANSACTIONS

To facilitate comparison of balance of payments accounts across countries at a given
period of time, a uniform system is required. For example, if credit and debit sides of a
transaction are not valued on the same basis, they will never be equal. Hence, certain
principles recommended by the IMF manual must be followed while preparing BoP
accounts. They are as follows:
• All the transactions must be valued at market prices.
• Exports and imports must be valued at free on board basis (Fob).
• Transactions denominated in foreign currency must be converted into domestic
currency at exchange rates prevailing in the market at the time the transaction
took place.
4.5 PRINCIPLES OF BOP ACCOUNTING

Balance of payment accounting involves double entry accounting system. Hence all the
transactions are recorded twice, once as credit (+) and then as a debit (–). The two basic
principles of BoP accounting are:
i. All transactions which lead to an immediate or perspective payment from the
Rest of the World (RoW) to the country are recorded as credit entries. The actual
or perspective payments are recorded as debit entries. Conversely, all the
transactions involving actual or perspective payments from the country to the
rest of the world are recorded as debits and the corresponding payments as
credits.
ii. Transactions which result in an increase in demand for foreign exchange, i.e.,
imports are recorded as debit entries, while transactions which result in an
increase in the supply of foreign exchange, i.e., exports are recorded as credit
entries.
Payment received from outside increases a country’s foreign assets and appears on the
debit side. On the other hand, payment made by the country to the rest of the world
decreases its foreign assets or increases its liabilities. As such it appears on the credit
35
side of the BoP account. This can be understood more clearly from the following
example:
Country P exports raw material worth $2000 to Country Q. An invoice has been
prepared for the same in Country Q and payment by Country Q will result in crediting
the bank account of Country P held in the importing country. The balance in such a
bank account is a foreign asset to the Country P and foreign liability to Country Q. This
entry in Country P’s BOP account will appear as follows:
BoP Account of Country P
Current Account Capital Account

Items Items
Credit Debit Credit Debit
Raw material Increase
Exports $2000 in foreign claims $2000
If Country Q agrees to export plastic worth $1000, then the entry will appear as follows:
Current Account Capital Account

Items Items
Credit Debit Credit Debit
Raw material Increase in
Exports $2000 foreign claims $2000
Decrease in
Plastic Import $1000 Foreign claims $1000
4.6 BALANCE OF PAYMENTS

Balance of payments covers all the visible and invisible economic transactions. It is a
wider concept than balance of trade which covers only visible transactions. Visible
transactions include services like import and export of goods while invisible
transactions include banking, insurance, and transport services and so on with rest of the
world. Balance of payments account is useful in forecasting exchange rate, disclosing
financial inflows and outflows in addition to growth indicators of a country’s economy.
Components of Balance of Payments
The Balance of Payments statement is classified into three major accounts namely
current account, capital account and reserve account.
Current Account: Current account records all international flows of monetary value
that have direct impact on the national income accounts. They are exports and imports
of merchandise, invisibles or services, inflows and outflows of investment income,
grants, remittances and other transfers. Merchandise exports are recorded as credit items
as payment is received by the country from the outside world and imports are recorded
as debit items as payment is made by the country to the outside world. Merchandise
trade is valued on free on board basis, as such any international freight and insurance
involved are not considered along with value of goods. Export and import of services is
treated in the same manner as merchandise exports/imports. Inflow of investment
income is recorded as credit item and outflow of the same is recorded as debit item.
Grants, remittances or unilateral transfers and other transfers can be treated as
36
Balance of Payments
redistribution of incomes and any outward payment is recorded as debit item and inward
payment received is recorded as credit item. For example, funds donated by India to
Pakistan towards earthquake relief are recorded as grants on debit side of BoP account.
Similarly, funds donated by US to India towards tsunami relief are recorded as a credit
item.
Current Account Credit Debit Net
1. Merchandise
a. Exports (on f.o.b. basis)
b. Imports (on c.i.f. basis)
2. Invisibles (a + b + c)
a. Services
i. Travel
ii. Transportation
iii. Insurance
iv. G.N.I.E
v. Miscellaneous
b. Transfers
vi. Official
vii. Private
c. Investment Income
Total Current Account (1 + 2)
Capital Account: Capital account records all international flows of monetary value that
are directly related to the assets of the country. They are foreign investments, loans,
banking capital, rupee debt service and other capital. Foreign investments may be either
direct investment such as GEMOTORS initiating a new venture in India or portfolio
investment like purchase of stocks in India by overseas institutional investors. Loans
procured can be categorized as concessional loans received by the government or public
sector bodies, long-term and medium-term loans from the commercial capital market,
bond issues, etc., and short-term credits. Disbursements received by Indian resident
entities are shown on credit side, while repayments and loans made by Indians are
shown on debit side. Banking capital includes any changes in foreign assets and
37
liabilities of commercial banks which belong to private sector or government and also
recognized co-operative banks dealing with foreign exchange. Rupee debt service
includes the cost of paying interest and regular contractual repayments of principal of a
loan along with administration charges in the Indian currency.
\ Capital Account Credit Debit Net
1. Foreign Investment (a + b)
a. In India
i. Direct
ii. Portfolio
b. Abroad
2. Loans (a + b + c)
a. External Assistance
i. By India
ii. To India
b. Commercial Borrowings (MT and LT)
i. By India
ii. To India
c. Short-term
To India
3. Banking Capital (a + b)
a. Commercial Banks
i. Assets
ii. Liabilities
iii. Non-Resident Deposits
b. Others
4. Rupee Debt Service
5. Other Capital
Total Capital Account (1 + 2 + 3 + 4 + 5)
ERRORS AND OMISSIONS

BoP statements though prepared in accordance with the double entry system may
sometimes show debits which are not equal to credits. This is because of collection of
date from different sources at different points of time. In such a case the difference is
shown as a separate item after capital account as ‘Errors and Omissions’. Errors and
Omissions show the net figure of imbalances thereby balancing the BoP.
38
Balance of Payments
Monetary Movements
Monetary movements include purchases and repurchases from IMF, India’s foreign
exchange reserves containing RBI holdings of gold and foreign currency assets and
finally SDRs (Special Drawing Rights).
Monetary Movements (i) + (ii) + (iii) Credit Debit Net

i. I.M.F.
ii. Foreign Exchange Reserves
(Increase – / Decrease +)
iii SDRs

a. Define BOP Account.
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
b. Discuss Balance of Trade.
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
Balance in the BoP Statement

The balance of payments as a whole will fully balance as it is prepared according to the
double entry system. As such the terms deficit and surplus in the BoP imply imbalance
because of certain items in the BoP statement. To find the imbalance, the complete BoP
statement is divided into a set of accounts one ‘above the line’ and another set ‘below
the line’. If there is positive net balance above the line, then it is called balance of
payments surplus. Conversely, if the same is negative, it is called balance of payments
deficit. The terms below the line are of compensatory nature and they ‘settle’ or
‘finance’ the difference above the line. The net balance below the line should be same in
magnitude and opposite in sign to the net balance above the line.
Trade Balance
The net value of merchandise exports minus merchandise imports is called trade
balance. The trade balance is shown by placing the merchandise flows alone above the
dividing line and all other items below the line. Changes in trade balance indicate
changes in the efficiency of the country in producing and exporting goods in which it
experiences comparative advantage. A surplus of exports over imports implies that
home country goods are competitive in nature and along with foreign importers,
domestic buyers also prefer these goods. Conversely a deficit implies that the home
country goods are not competitive and appropriate measures must be taken to improve
the same. The Balance of Payments accounts provide a monthly trade balance
information.
Current Account Balance
Current account balance refers to the difference between domestic savings and
domestic investments in a given period. Any deficit in this account implies that domestic
39
savings are insufficient to fund domestic investment. This results in import of savings
from overseas. Excess of domestic savings over domestic investment results in current
account surplus and this results in a favorable or surplus of BoP positions. The current
account balance indicates the country’s stock of net international assets.
Capital Account Balance
The capital account balance shows how the balance in current account is financed.
The greater the finances obtained on commercial terms, the greater will be the
vulnerability of the country to volatility in interest rates. Capital account balance can be
defined as a country’s receipts less payments for capital account transactions. When the
balance of current and capital accounts combined is negative, then the BoP has deficit
balance. This can be balanced by reducing foreign exchange and gold reserves.
The Balance of Payments account always Balances
The Balance of Payments account always balances as a whole. A country’s total
outgoings must be equal to its total receipts. The current account surplus must be
matched by a rise in external assets and a current account deficit by a fall. As all the
transaction are recorded on double entry basis, the BoP account must always balance.
But, in reality, the BoP account seldom balances because of different data sources and
imperfect nature of data collection. For this purpose, a balancing item called ‘Errors and
Omissions’ is included in the BoP account. This item indicates the values of
discrepancies resulting due to different exchange rates applied to receipts and payments.
Balance in Current Account + Balance in Capital Account
+ Change in Monetary Movements = Zero.
When no change happens in the monetary movement, then:
Surplus/deficit in current account = deficit/surplus in capital account
Principles for Timing the Recording of Transactions
The principles given by IMF in the case of timing of transactions are as follows:
a. Current Account: Merchandise trade should be recorded when the change in
ownership takes place. (This occurs when the corresponding payment is made.)
b. Capital Account: Capital account transactions are recorded when change in
ownership is assumed to have taken place through banking channels.
4.7 FACTORS AFFECTING THE COMPONENTS OF BOP

ACCOUNT
Various factors affect the exports and imports of goods and services:
• Value of Domestic Currency: An appreciation of domestic currency makes
exports of goods uncompetitive and a depreciation would facilitate an increase in
demand. However, an appreciation of Home Currency makes imports less
expensive/cheap and depreciation would make imports costly.
• Inflation Rate: Higher inflation rate results in lower competitiveness and lower
demand for domestic goods for exports. Yet, lower demand for domestic goods
and services need not necessarily mean a lower demand for the domestic
currency. If the demand for domestic goods is relatively inelastic, then the fall in
demand may not offset the rise in price completely, resulting in an increase in the
value of exports. This would end up increasing the demand for the local
currency. In the case of imports, a domestic inflation rate that is higher than the
40
Balance of Payments
inflation rate of other economies, would result in imported goods and services
becoming relatively cheaper than domestically produced goods and services.
This would increase the demand for the former and hence, the supply of the
domestic currency.
• Trade Barriers: More number of trade barriers imposed by domestic country
leads to lower imports and exports resulting in lower supply of domestic
currency.
• Any increase in commodity price (domestic price remains the same) in the world
market results in increase in export of that good. This increases the demand for
domestic currency. Conversely, any reduction in the commodity price ultimately
leads to decrease in demand for domestic currency.
• A positive correlation exits between income of the resident of importing country
and exports. When all the other things remain constant, any increase in standard
of living of the resident of importing country will result in increase in domestic
goods leading to increase in demand for domestic currency.
Income on Investments
Payments with regard to interest, dividends, profits etc., depend on the level of past
foreign investment and prevailing domestic rates of return. Receipts depend on the level
of past domestic investments in foreign countries and the prevailing foreign rates of
return.
Transfer Payments
The following two factors affect transfer payments:
i. Number of migrants to or from a country, who may receive money from or send
money to relatives.
ii. Country’s desire to generate goodwill by providing aids to other countries or in
turn to take grants or aids to overcome certain problems.
Capital Account Transactions
The following major factors affect international capital transactions:
i. The rate of return earned on the investments compared to domestic investment

returns.
ii. Additional risk associated with the above returns.
iii. Expected movement in the exchange rates.
4.8 BALANCE OF PAYMENTS COMPILATION

BoP account is compiled using information from different sources. The major source of
information is R-Returns which is submitted by the authorized dealer to RBI every
fortnight. R-Returns provide information regarding foreign exchange transactions
entered into by the ADs, including the transactions passing through the rupee accounts
of non-resident banks. Other sources include Department of Economic Affairs under the
Ministry of Finance, Government of India and other government agencies located
overseas and various surveys conducted for BoP compilation etc. All the transactions
under different heads and sub-heads are combined and based on the net figures, a BoP
account is prepared.
41
4.9 BALANCE OF PAYMENTS ACCOUNT – THE INDIAN

PERSPECTIVE
The Indian BoP account is prepared in accordance with the principles given in the IMF
manual. All the transactions in the BoP account, excluding merchandise the trade are
recorded at actual price rather than market price and are paid through bank. Imports are
recorded at c.i.f value (cost, insurance, freight value). Transactions recorded in foreign
currency are converted into Indian rupees according to average exchange rate for that
particular month. Timings for transactions given by IMF are followed for capital
account transactions, transportation and insurance services, transfer payments and
undistributed income. Exports are recorded only after customs clearance for shipment
and imports are recorded when they are actually paid for.
The Statement
The Indian Balance of Payments Account appears as follows:
India’s BoP Account
Item Credit Debit Net
A. Current Account
i. Merchandise
ii. Invisibles (a + b + c)
a. Services
b. Transfers
c. Income
Total Current Account (i + ii)
B. Capital Account
1. Foreign Investment (a + b)
a. Foreign Direct Investment
i. In India
ii. Abroad
b. Portfolio Investment
i. In India
ii. Abroad
2. External Assistance, Net
3. Commercial Borrowings
4. Short Term to India
5. Banking Capital
6. Rupee Debt Service
7. Other Capital, Net
8. Total Capital Account (1 – 5)
C. Errors & Omissions
D. Overall Balance [A(5) + B(8) + C]
E. Monetary Movement (i + ii)
i. I.M.F
ii. Foreign Exchange Reserve (–/+)
42
Balance of Payments
4.10 IMPORTANCE OF BOP STATISTICS
The study of various factors affecting the demand and supply of a currency helps in
forecasting exchange rate based on BoP account. For example, the direction of
movement of exchange rates can be predicted. Any movement in the reserves of the
country furnishes certain indications with regard to the possible movement of exchange
of the currency. A continuous depletion of reserves indicates repeated BoP deficit and
the simultaneous pressure on the exchange rate results in selling of reserves (for the
sake of domestic currency) in order to increase the demand for domestic currency and to
maintain the exchange rate.
4.11 LIMITATIONS OF BALANCE OF PAYMENTS

BoP accounts suffer from following limitations:
i. BoP statistics are useful in predicting only general trends in exchange rates.
ii. Interpreting BoP data is little complicated and all the different balances must be
considered in addition to their actual and expected trends.
iii. BoP data of a country indicates only possible appreciation or deprecation of its
currency.
a. Explain various factors that affect the exports and imports of goods and
services.
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
b. Discuss various sources of information used in compiling BoP statement.
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
4.12 RELATIONSHIP BETWEEN BOP VARIABLES AND OTHER

ECONOMIC VARIABLES
Implications of a Recurring Current Account Surplus/Deficit
The national income of a country can be shown by the following equation:
Y = C + G + I + (X – M) … Eq. (1)
Here,
Y = National Income
C = Consumption
I = Investment
X = Exports
M = Imports
G = Government Expenditure.
43
The above equation can be rewritten as:
X – M = Y – (C + G + I) … Eq. (2)
The left hand side equation indicates current account balance and the right hand side
indicates difference between income and expenditure. Thus, a current account surplus
implies that a country is not consuming as much as it is producing. In other words, it is
living below its means. This type of situation will be beneficial to a developed country
compared to a developing country. It would be beneficial to developing countries, if
they could run a current account deficit and finance it by a capital account surplus i.e.,
live beyond their means. The way the deficit is being financed and the purpose for
which it is being used are important aspects to be considered with regard to the growth
problem faced by the developing countries. If the deficit is being financed by short-term
borrowing which would need to be repaid before the corresponding investments star
generating adequate returns, the country may get into problems as it must refinance its
borrowings at increasingly higher costs. The second aspect would be more clear with
the help of an equation. The income can also be written as Sum of Consumption (C),
Taxes paid (T) and Savings (S). The equation can be written as:
Y = C+T+S … Eq. (3)
Using Eq. (3), Eq. (2) can be rewritten as:
X – M = (C + T + S) – (C + G + I)
= (S – I) + (T – G) … Eq. (4)
The second term on the right hand side of the equation indicates the budget deficit.
4.13 SUMMARY
The information provided in Balance of Payments must be interpreted with utmost care.
The Balance of Payments statement is classified into three major accounts namely
current account, capital account and reserve account.
Balance of Payments account is useful in forecasting exchange rate, disclosing financial

inflows and outflows in addition to growth indicators of a country’s economy.
As balance of payments covers all the visible and invisible economic transactions, it is a
wider concept than balance of trade which covers only visible transactions.
Balance of payments account along with other economic factors must be considered for
the purpose of predicting movement in exchange rates.
4.14 GLOSSARY
Capital Account Balance is a part of the balance-of-payments which reflects the net
inflow of public and private capital.
Cost, Insurance and Freight (CIF) is used in connection with a price quotation under
which a seller in addition to the payment of costs of goods and transportation to the
named port, must also provide insurance up to the named destination. It is the same as
C&F except that the seller also provides insurance up to the named destination.
Current Account Balance is a part of the balance-of-payments which reflects the net
inflow on account of trade in goods, services and transfer payments.
44
Balance of Payments
International Monetary Fund (IMF) is a supranational body, created to help
countries in maintaining exchange rate stability which came into existence along
with the World Bank.

• Maurice D. Levi. International Finance.
• Machiraju, H.R. International Financial Management.

a. Balance of payments covers all the visible and invisible economic transactions. It
is a wider concept than balance of trade which covers only visible transactions.
Visible transactions include services like import and export of goods while
invisible transactions include banking, insurance, and transport services and so
on with rest of the world. Balance of payments account is useful in forecasting
exchange rate, disclosing financial inflows and outflows in addition to growth
indicators of a country’s economy.
b. Balance of trade is the difference between the monetary value of exports and
imports of output in an economy over a specific period of time. It is the
relationship between a nation's imports and exports. A positive or favorable
balance of trade is referred to as a ‘trade surplus’ where exports more than
imports. A negative or unfavorable balance is referred to as a ‘trade deficit’,
where the balance of trade is sometimes divided into a goods and a services
balance.

a. Various factors affect the exports and imports of goods and services:
i. Value of Domestic Currency: An appreciation of domestic currency
makes exports of goods uncompetitive and a depreciation would facilitate
an increase in demand. However, an appreciation of Home Currency
makes imports less expensive/cheap and depreciation would make
imports costly.
ii. Inflation Rate: Higher inflation rate results in lower competitiveness and
lower demand for domestic goods for exports. Yet, lower demand for
domestic goods and services need not necessarily mean a lower demand
for the domestic currency. If the demand for domestic goods is relatively
inelastic, then the fall in demand may not offset the rise in price
completely, resulting in an increase in the value of exports. This would
end up increasing the demand for the local currency. In the case of
imports, a domestic inflation rate that is higher than the inflation rate of
other economies, would result in imported goods and services becoming
relatively cheaper than domestically produced goods and services. This
45
would increase the demand for the former and hence, the supply of the
domestic currency.
iii. Trade Barriers: More number of trade barriers imposed by domestic
country leads to lower imports and exports resulting in lower supply of
domestic currency.
b. BoP account is compiled using information from different sources. The major
source of information is R-Returns which is submitted by the authorized dealer
to RBI every fortnight. R-Returns provide information regarding foreign
exchange transactions entered into by the ADs, including the transactions
passing through the rupee accounts of non-resident banks. Other sources include
Department of Economic Affairs under the Ministry of Finance, Government of
India and other government agencies located overseas and various surveys
conducted for BoP compilation etc. All the transactions under different heads
and sub-heads are combined and based on the net figures, a BoP account is
prepared.

A. Multiple Choices
1. Which of the following is an invisible transaction?
a. Banking.
b. Insurance.
c. Transportation.
d. None of the above.
e. All of the above.
2. Which of the following statements is true?
a. Balance in Current Account + Balance in Capital Account = Zero.
b. Balance in Current Account – Balance in Capital Account = Zero.
c. Balance in Current Account + Change in Monetary movements = Zero.
d. Balance in Capital Account + Change in Monetary movements = Zero.
e. Balance in Current Account + Balance in Capital Account + Change in
Monetary movements = Zero.
3. Indian BoP account is prepared according to the provisions of the ________.
a. International Monetary Fund
b. Foreign Exchange Regulation Act
c. Reserve Bank of India
d. Both (a) and (c) of the above
e. Both (b) and (c) of the above.
4. Which of the following statements is true with regard to national income?
a. National income = Consumption + Taxes Paid.
b. National income = Consumption + Taxes Paid + Savings.
c. National income = Consumption – Taxes Paid + Savings.
d. National income = Consumption – Taxes Paid – Savings.
e. National income = Consumption + Savings.
5. Imports in Indian BoP statement are recorded on the basis of ___________.
46
Balance of Payments
a. Cost, Freight, Insurance Value
b. Cost & Freight Value
c. Freight & Insurance
d. Cost & Insurance
e. Free on Board.
B. Descriptive
1. Explain various components of Balance of Payments account.
2. Explain different factors affecting the components of BOP account.
3. Explain Balance of Payments account in the Indian context.
4. How do you compile Balance of Payments account?
practice only.
47
NOTES
48
Block Unit Unit Title

Nos.
I FUNDAMENTALS OF INTERNATIONAL
MANAGEMENT
1. Introduction to International Finance
2. Theories of International Trade
3. International Trade Finance in India
4. Balance of Payments
II FOREIGN EXCHANGE MARKET
5. International Monetary System
6. The Foreign Exchange Market
7. Exchange Rate Determination
8. Exchange Rate Forecasting
III EXCHANGE RISK MANAGEMENT
9. Introduction to Exchange Risk
10. Management of Exchange Risk

11. International Project Appraisal
IV INTERNATIONAL FINANCIAL MANAGEMENT
12. International Financial Markets and Instruments
13. International Equity Investments
14. Short-Term Financial Management
15. International Accounting and Taxation
V INTERNATIONAL TRADE
16. Trade Blocks
17. Foreign Trade Policy
18. Documentary Credits
19. Export Finance and Exchange Control

Regulations Governing Exports
20. Import Finance and Exchange Regulations
Relating to Import Finance

SMB2F1 1

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

SMB2F1 1

Transféré par

Droits d'auteur :

Formats disponibles

MBA-0000

Prof. Y. K. Bhushan Dr. O. P. Gupta

Dr. Lata Chakravorty Prof. D. S. Rao

Prof. P. Bala Bhaskaran Dr. Dhananjay Keskar

Course Preparation Team

Shri T. S. Rama Krishna Rao Prof. Hilda Amalraj

Ms. Anita Prof. Bratati Ray

Ms. C. Padmavathi Dr. Vijaya Lakshmi S

Ms. Sudha Dr. Vunyale Narender

Ms. Sunitha Suresh Prof. Arup Chowdhury

© The ICFAI University Press, All rights reserved.

Ref. No. IF SLM – 072011R B1

The ICFAI University Press, Hyderabad

1.3 NEED TO STUDY INTERNATIONAL FINANCE

1.4 MEANING AND IMPLICATIONS OF GLOBALIZATION

1.5 INTEGRATION OF FINANCIAL MARKETS

1.8 SUGGESTED READINGS/REFERENCE MATERIAL

1.9 SUGGESTED ANSWERS

• Why does international trade take place?

2.3 THEORY OF ABSOLUTE ADVANTAGE

2.4 THEORY OF COMPARATIVE ADVANTAGE

2.5 HECKSCHER-OHLIN MODEL

2.6 IMITATION-GAP THEORY

2.7 INTERNATIONAL PRODUCT LIFE CYCLE THEORY

a. Explain in brief the significance of comparative advantage theory.

b. Define ‘demand lag’ and ‘imitation lag’.

2.8 DEVELOPMENTS ON THE INTERNATIONAL TRADE FRONT

2.9 TRADE BARRIERS

When tax is levied on internationally traded goods, it is known as tariff. If it is collected

Reasons for Imposition of Trade Barriers

• It is a source of revenue to the government.

• It improves the economic condition of the country.

• It results in free trade implications.

• It protects the domestic industry that has great growth potential.

• It acts as a retaliator for other countries imposing trade barriers.

• It reduces expenditure in foreign currency by the citizen, to improve balance of

• Increase in cost of foreign goods and shift in domestic demand towards

• Due to higher price consumers consume less of that particular good.

• Tariff generates revenue for the government.

a. Elucidate in brief risks in international trade.

b. Discuss tariff barriers vs. non-tariff barriers.

Simultaneous export and import of a product by a particular country is called intra-

2.12 SUGGESTED READINGS/REFERENCE MATERIAL

2.13 SUGGESTED ANSWERS

3.3 The Role of Exim Bank of India in Trade Finance

3.3.2 Lending to Indian Companies

3.3.3 Lending to Foreign Governments and Foreign Companies

3.3.4 Lending to Indian Banks

3.4 Global Trade Finance Limited

3.5 Exchange Control Regulations Related to Merchant Transactions

3.8 Suggested Readings/Reference Material

3.9 Suggested Answers

3.10 Terminal Questions

3.3 THE ROLE OF EXIM BANK OF INDIA IN TRADE FINANCE

1. Direct Assistance 1. Buyers’ Credit 1. Bill Rediscounting

3.3.2 Lending to Indian Companies

i. Supplies made in India to World Bank/IDA-aided projects against international

ii. Supplies to free-trade zones/100 percent export oriented units.

iii. Sales to foreign shipping companies.

Assistance to Export-Oriented Units

Forfaiting is a common form of financing export related receivables. It is similar to Bill

Figure 1: A Flow Chart of a Forfaiting Transaction

Self Assessment Questions – 1