Question
Indian investors lend abroad. Answer the following questions:
(a) In which sub-account and on which side of the Balance of Payments Account such lending is recorded? Give reasons.
(b) Explain the impact of the lending on market exchange rate.
Solution
Indian investors lending abroad leads to an outward flow of foreign exchange and is hence treated as a negative item in the capital account of balance of payments.
b. This will reduce the supply of foreign currency from SS to S′S. Hence, the new equilibrium is reached at Point E′ with a new exchange rate OR1.
