(i) Foreign investments will be recorded in the Capital Account of the BOP Account because these give rise to foreign exchange liabilities. Foreign investment will be recorded on the credit side because these bring in foreign
(ii) Foreign investment add to supply of foreign exchange. Demand remaining unchanged, it brings downward influence on exchange rate.
Detailed Answer:
(i) Foreign investments in India will be recorded in the Capital Account of Balance of Payments Account as it leads to decrease in the asset of the residents of the country to the rest of the world.
It is recorded on the credit side of Balance of Payments Account as it leads to inflow of foreign exchange.
(ii) Foreign investment in India will lead to increase in the supply of foreign exchange.
If the supply of foreign exchange increases in the foreign exchange market, it will lead to a rightward shift in the supply curve from SS to S1S1 and exchange rate will fall to OR1.
