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Foreign transactions can be categorized as Autonomous or Accommodating transactions

 

Autonomous Transactions

They are transactions which are undertaken for profit motive

These are normally undertaken by Private sectors

These are undertaken irrespective of status of BOP

Example

If a businessman wants to purchase goods and imported goods are cheaper as compared to Indian goods

He will go ahead and purchase imported goods

He will not consider the fact that it will lead to increase in import and negative BOP

These transactions can take place in both Capital and Current Account.

Example-Autonomous Transactions - Teachoo.JPG

option-1-loan-of-300-taken-from-indian-bank-11---teachoo.jpeg

option-2--loan-of-300-taken-from-foreign-bank-3---teachoo.jpeg

Which Option will businessman choose - Teachoo.JPG

Accommodating Transactions

They are transactions which are not undertaken for profit motive

These are normally undertaken by Government sectors

These are normally undertaken if BOP is in negative

Example

There is current account deficit of -300 and capital account surplus of 200

In this case, Bill of payment = -300 + 200 = -100

So govt will engage in official reserve transactions (sell its foreign exchange transactions)

This will lead to decline in

They take place only in Capital Account.

What are Accommodating Transactions - Teachoo.JPG

Difference between Autonomous and Accommodating Transactions - Teachoo.JPG

NCERT Questions

No questions in this part

Other Books

Question 1

In the following questions, select the correct answers:

Autonomous transactions take place on

  1. Real Account
  2. Capital Account
  3. Current Account
  4. None of these
View Answer

Question 2

___ transactions are undertaken to cover the deficit or surplus in autonomous transactions.

  1. Current Account
  2. Capital Account
  3. Accommodating
  4. None of these
View Answer

Question 3

Foreign exchange transactions dependent on other foreign exchange transactions are called:

  1. Current account transactions
  2. Capital Account transactions
  3. Autonomous Transactions
  4. Accommodating Transactions
View Answer

Oswaal Questions

Question 1

Foreign Exchange Transactions which are independent of other transactions in the Balance of Payments Account are called:

  1. Current transactions.
  2. Capital transactions.
  3. Autonomous transactions.
  4. Accommodating transactions.
View Answer

Question 2

Foreign Exchange Transactions dependent on other Foreign Exchange Transactions are called:

  1. Current account transactions.
  2. Capital account transactions.
  3. Autonomous transactions.
  4. Accommodating transactions.
View Answer

Question 3

Which of the following statements is not true?

  1. Borrowings from the Asian Development Bank by the government is an accommodating transaction.
  2. Loans given to Sri Lanka by the government is an accommodating transaction.
  3. Buying of machinery from Japan is an accommodating transaction.
  4. Borrowing from public is an accommodating transaction.
View Answer

Question 4

Assertion (A): Autonomous items cause movements of goods and services across the borders.

Reason (R): Accommodating items cause to clear the deficit or surplus in the Balance of Payment.

Mark the correct choice:

  1. Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).
  2. Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
  3. Assertion (A) is true, but Reason (R) is false.
  4. Assertion (A) is false, but Reason (R) is true.
View Answer

Question 5

Read the news report given below and answer the questions 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 in 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 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 Arcelor Mittal 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 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 $13 billion surplus in the March'18 quarter. - "Fall in trade deficit, strong flows boost balance of payments no's in Q4" - The Economic Times - May 15th, 2019.

 

Question 1

Which of the following is not the benefit of a lower trade deficit?

  1. Help the external sector balance sheet.
  2. Prop-up the Current Account.
  3. Increase the Balance of Payment numbers.
  4. Increase the Capital Account deficit.
View Answer

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Transcript

Example- Autonomous Transactions Suppose India is Facing Balance of Payment Deficit Current Account Surplus Capital Account (Deficit) Balance of Payment Surplus Current Account Surplus Capital Account (Deficit) Balance of Payment Surplus 1000 -1100 -100 A businessman wants to take loan of 300 crores He has 2 options Take loan from Indian Bank @ 11% or Take loan from USA Bank @ 3% What is Effect of Balance of Payment of these Transactions? OPTION 1-Loan of 300 taken from Indian Bank @ 11% Current Account Surplus Capital Account (Deficit) Balance of Payment Surplus Before taking loan 1000 -1100 -100 After taking loan 1000 -1100 -100 This loan has no effect on Balance of Payment as loan is from India OPTION 2- Loan of 300 taken from Foreign Bank @ 3% Current Account Surplus Capital Account (Deficit) Balance of Account Surplus Before taking loan After taking loan 1000 -1100 -100 1000 -1400 -400 This loan Increases Balance of Payment Deficit (Not beneficial for India) Which Option will businessman choose ? Option 1 Loan from Indian Bank @ 11% This loan has no effect on BOP But It has lower Rate of Interest (Cheaper) Option 2 Loan from Foreign Bank @ 3% This loan increases deficit in BOP But It has higher Rate of Interest (Expensive) Businessman will choose this option because it is at lower rate of interest and he will save cost This type of transaction is called Autonomous Transaction as it is undertaken for Profit Motive What are Accommodating Transactions Suppose India is Facing Balance of Payment Deficit Current Account Surplus Capital Account (Deficit) Balance of Account Surplus 1000 -1100 -100 What will RBI do in this case? OPTION 1 RBI will Sell Foreign Currency of 100 to meet deficit Option 2 RBI will borrow 100 from IMF/World Bank etc. Note Above transactions are not undertaken for Profit Motive. They are undertaken to accommodate or manage Balance of Payment Deficit .So it is called Accommodating Transactions Difference between Autonomous and Accommodating Transactions AUTONOMOUS TRANSACTION ACCOMODATING TRANSACTIONS They are international transactions which are undertaken for profit motive They are undertaken by Private Sector They are undertaken irrespective of effect on Balance of Payment They are international transactions which are undertaken to cover BOP Surplus/Deficit They are undertaken by Monetary Authority (Central Bank, RBI) They are undertaken after seeing status of Balance of Payment Surplus/deficit

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CA Maninder Singh is a Chartered Accountant for the past 12 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.