Hey kind souls of the forum.
An elementary doubt. ECBs come under Capital Account if I am not wrong. So if Private investments seek external funding, why would it widen CAD (CAD I am guessing is Current Account Deficit)? Shouldn't it just have bearing just on Capital Account Balance reserve?
Thanks.
ECBs are mostly raised on floating interest rates that are volatile. The principal amount is a part of Capital account, However, the interests are to be paid yearly and hence, are a part of Current Account. So, ECBs can widen CAD courtesy the interest payments!
@AzadHindFauz Thanks for the reply. Makes sense.
How would the same logic hold for FDI and FIIs. According to UPSC, adopting suitable policies which attract greater FDI and more funds from FIIs will reduce CAD (Q. 10, 2011 UPSC Paper).
FDIs are considered to be part of Capital Account but they are used to finance CAD unlike ECBs. (Am I thinking on the right lines?) Or ECBs can also be used to finance CAD but they have an interest liability while FDIs are completely liability free as far as Current Account calculations are concerned.
However if there is higher FDI, then NIIP is hampered.
Am I making sense?
Hey kind souls of the forum.
An elementary doubt. ECBs come under Capital Account if I am not wrong. So if Private investments seek external funding, why would it widen CAD (CAD I am guessing is Current Account Deficit)? Shouldn't it just have bearing just on Capital Account Balance reserve?
Thanks.
ECBs are mostly raised on floating interest rates that are volatile. The principal amount is a part of Capital account, However, the interests are to be paid yearly and hence, are a part of Current Account. So, ECBs can widen CAD courtesy the interest payments!
@AzadHindFauz Thanks for the reply. Makes sense.
How would the same logic hold for FDI and FIIs. According to UPSC, adopting suitable policies which attract greater FDI and more funds from FIIs will reduce CAD (Q. 10, 2011 UPSC Paper).
FDIs are considered to be part of Capital Account but they are used to finance CAD unlike ECBs. (Am I thinking on the right lines?) Or ECBs can also be used to finance CAD but they have an interest liability while FDIs are completely liability free as far as Current Account calculations are concerned.
However if there is higher FDI, then NIIP is hampered.
Am I making sense?
1. Please put the question for better contextualisation. From what I understood, FDIs and FIIs don't affect your CAD directly, but they do help in reducing the import bills if they are targeted in sectors that see high imports. Say, an FDI comes in for oil extraction from Mumbai High and we hit a jackpot in oil reserves that were hidden earlier.
2. For quite sometime, we are funding our CAD with Capital Account Surplus. FDIs help in that regard. But, instead of taking the ECB route that needs debt servicing from the Current Account, in effect, reinforcing the deficit till perpetuity- we prefer the FDI route. With FDI, there is no such obligation. True.
3. NIIP is a different indicator. It reveals about our creditworthiness. USA is the most indebted country in the world, yet the investors devour the country for investment purposes. A negative NIIP might also indicate a generally decent ecosystem for foreign investors.
Sorry for not contextualizing with the question. Please see attached. Thanks for your time. Wish the best for 4th October.
