The balance of payments and the fluctuations in the exchange values of currencies are not simple monetary or economic phenomena, but they are the highly inflammable fuel that can set the economy on fire and unleash the cancerous inflation in the price levels.

The central bank of any country, in addition to its responsibility of monitoring the domestic economy through the banking and the financial sectors, has, on its shoulders, the burden of monitoring the inflows and outflows of foreign currencies into and from the country's exchequer. These occur as a result of remittances on account of trade and other economic relationships with other countries. The net position of the inflows and outflows of the foreign currency, whether in `favor' or `against' the country, does have a significant impact on the value of the domestic currency and thereby on the price levels of the country's products and services. In other words, the effect of the net position is on the perpetually-dreaded economic malady, namely, inflation.

The net position of foreign currency holdings of the country, known in the economic parlance as Balance of Payments (BoP) status of the country, has significant thrust on the economy. Hence, it requires constant attention of the monitoring authority of the country. Careful management of the balance of payments through proper control on the inflow and outflow of the currency is, therefore, a prerequisite for a stable economy.

Professional Banker Magazine, Balance of Payments, BoP, Financial Sectors, Banking Sectors, Reserve Bank of India, RBI, Indian economy, Currency Obligations, Indian Banking System, Gross Domestic Product, GDP, Cash Reserve Ratio, CRR, Statutory Liquidity Ratio, REPO, Repurchase Obligations on Securities, Open Market Operations, Foreign Exchange Management.