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How does BOP deficit and BOP surplus affect the exchange rate? ?
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How does BOP deficit and BOP surplus affect the exchange rate? ?
BOP Deficit and Exchange Rate


A balance of payments (BOP) deficit occurs when a country's total imports exceed its total exports. This means the country is spending more foreign currency than it is earning, resulting in a negative BOP. This can have a significant impact on the country's exchange rate.


Effect on Exchange Rate



  • A BOP deficit can lead to a decrease in the value of a country's currency.

  • The excess supply of the country's currency on the foreign exchange market leads to a decrease in demand, which results in a depreciation of the currency.

  • This depreciation makes imports more expensive, which can help reduce the deficit by making domestic goods more competitive on the global market.



BOP Surplus and Exchange Rate


A BOP surplus occurs when a country's total exports exceed its total imports. This means the country is earning more foreign currency than it is spending, resulting in a positive BOP. This can also have a significant impact on the country's exchange rate.


Effect on Exchange Rate



  • A BOP surplus can lead to an increase in the value of a country's currency.

  • The excess demand for the country's currency on the foreign exchange market leads to an increase in value, which results in an appreciation of the currency.

  • This appreciation makes exports more expensive, which can help reduce the surplus by making foreign goods more competitive in the domestic market.



Conclusion


In conclusion, a country's BOP deficit or surplus can have a significant impact on its exchange rate. A deficit can lead to a decrease in the value of the currency, while a surplus can lead to an increase in the value of the currency. These fluctuations in exchange rates can have a ripple effect on the country's imports, exports, and overall economy.
Community Answer
How does BOP deficit and BOP surplus affect the exchange rate? ?
The balance of trade influences currency exchange rates through its effect on the supply and demand for foreign exchange. ... In contrast, if a country imports more than it exports, there is relatively less demand for its currency, so prices should decline. In the case of currency, it depreciates or loses value.
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Read the following case study paragraph carefully and answer the question based on the same.The central bank of India i.e. Reserve Bank of India is the apex institution that controls the entire financial market. It’s one of the major functions is to maintain the reserve of foreign exchange. Also, it intervenes in the foreign exchange market to stabilize the excessive fluctuation in the foreign exchange rate.In other words, it is the central bank’s job to control a country’s economy through monetary policy; if the economy is moving slowly or going backward, there are steps that the central bank can take to boost the economy. These steps, whether they are asset purchases or printing more money, all involve injecting more cash into the economy. The simple supply and demand economic projection occurs and currency will devalue.When the opposite occurs, and the economy is growing, the central bank will use various methods to keep that growth steady and in-line with other economic factors such as wages and prices. Whatever the central bank does or doesn’t do, will affect the currency of that country. Sometimes, it is within the central bank’s interest to purposefully affect the value of a currency. For example, if the economy is heavily reliant on exports and their currency value becomes too high, importers of that country’s commodities will seek cheaper supply; hence directly affecting the economy.Q. Which of the following steps should be taken by the central bank if there is an excessive rise in the foreign exchange rate?

Read the news report given below and answer the question that follow on the basis of the same: A lower trade deficit along with strong FDI and portfolio flows in F/Y 19 January-March quarter may help the external sector balance sheet and prop up both current account as well as the overall balance of payments numbers. This could reflect a lower current account deficit in the balance of payments for the quarter ended March. Trade balance, an important component of the current account, is estimated at a deficit of $35.6 billion for Q4 compared to $40.6 billion in the same period a year ago, thanks to lower crude prices and slowdown in gold and other imports. Other factors influencing the current account are software services income and remittances by overseas Indians. Market estimates for the F/Y 19 March quarter current account deficit is at $8.1 billion versus $13.2 billion for March’18 quarter.In the capital account, thanks to some bidding for defaulting companies by ArcelorMittal which are expected to have bought in some funds, FDI inflows in March is projected to be almost double the amount in the previous comparable period of March’18. Also, external commercial borrowing flows in the latest quarter are almost double the amount of the previous comparable quarter ending March’18. In addition, forex resources raised through the swap agreements with the commercial banks are expected to add another $5 billion through the foreign investment route. The overall balance of payments surplus is estimated higher at $17 billion for the latest March quarter compared to the $13 billion surplus in the March’18 quarter.Q. The Forex resources have surged in India. What effect does it have on the country?

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How does BOP deficit and BOP surplus affect the exchange rate? ?
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