Question 5) On 12^th March 2021, the RBI released the Q4FY21, Balance of Payments data that showed that the country's current account deficit (CAD) increased sharply to $1.4 billion, or 1.2 per cent of GDP. The financial account flows have seen a higher outflow of FIIs marking 1.4 trillion and lower inflows amount of 0.5 trillion during Q4 2021 also showing a negative financial account flow.

i) What is Balance of Payments (BOP) and can the above-mentioned current account deficit get "balanced"? What happens if the BOP does not balance? (3 marks)

ii) Based on the following news

After six months of consecutive inflows, foreign institutional investors (FII) turned net sellers of domestic stocks in April. FIIs pulled out $1.29 billion worth of domestic securities in April, the highest since March 2020, according to domestic brokerage and research firm Edelweiss Securities. The outflows came about as India began witnessing a massive outbreak of the coronavirus once again, while the world was easing restrictions and expanding vaccination coverage. Prior to last month's outflow, FPIs pumped in $26.8 billion in equities between October 2020 and March 2021. The outflows are just a fraction of what FIIs had pumped in since October last year. The largest selling was witnessed by the banking and finance sector stocks, where FIIs pulled out $1.29 billion. This was followed by the oil and gas sector, where outflows stood at $466 million, and the metal sector saw FIIs sell securities worth $242 million.

1. What is the impact of this news on INR? B) What are the consequences of the change in INR on level of exports and level of imports? C) Will the cost of import be higher or lower? (4 marks)