Notes on Flow of Funds Account.docx

Notes on Flow of Funds Account.docx - Notes from RBI...

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Notes from RBI METHODOLOGY REPORT The Flow of Funds (FOF) accounts represent a systematic record of financial transactions through a variety of instruments among the various sectors of the economy during a given period of time. The FOF accounts serve as an important policy-supportive analytical tool in at least five major ways. 1. First, the accounts help to assess the nature and pace of financial development of the economy. 2. Second, these accounts unravel the relationship of the financial sector with the real economy (i.e. the non-financial sectors) and thereby provide insights into their saving, capital formation, wealth and indebtedness. 3. Third, the FOF accounts can be used to check consistency with corresponding parameters derived independently from the national accounts and the balance of payments . In fact, the FOF projections undertaken in some countries serve to supplement and cross-check the macroeconomic projections based exclusively on the non-financial sectors. 4. Fourth, the FOF accounts can help gauge the impact of monetary policy on the volume of financial resources mobilized by different sectors of the economy as also on the portfolio choice between money and other financial assets. 5. Finally, the FOF accounts can be used to assess financial inter- connectedness as well as financial stability/vulnerability of the economy. Recognizing these inherent advantages, many advanced and emerging market countries have been compiling the FOF accounts over the years. In fact, it is the central banks in many of these countries - such as the Federal Reserve Board, the European Central Bank, the Bank of Japan, the People’s Bank of China, the South African Reserve Bank and the Reserve Bank of India (RBI) – that have been compiling the FOF accounts. The present methodology of compilation of the FOF accounts for the Indian economy aggregates the domestic institutional units into five mutually exclusive sectors. The sectors are (i) Banking sector which comprises the RBI, Commercial Banks, Cooperative Banks and Credit Societies; (ii) Other Financial Institutions (OFIs) sector which comprises ‘Financial
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