Question 1

Consider the following statements regarding the components of India's Balance of Payments (BoP):

1. Portfolio Investment is recorded under the Balance of Invisibles in the Current Account.
2. Net Factor Income from Abroad (NFIA) is a component of the Capital Account.
3. Remittances received from non-residents are recorded as a credit item under the Current Account.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. Foreign Investments, which include Portfolio Investment, are transactions related to capital assets and are therefore recorded under the Capital Account, not the Current Account. Statement 2 is incorrect. Net Factor Income from Abroad (NFIA) is classified under 'Income', which is a component of 'Invisibles' within the Current Account. It represents earnings from factors of production. Statement 3 is correct. Remittances are a form of transfer payment. Transfers are classified under 'Invisibles' within the Current Account. As they represent an inflow of foreign currency, they are recorded as a credit item.

Question 2

Consider the following statements regarding the accounting principles of the Balance of Payments (BoP):

1. An increase in a country's foreign liabilities is recorded as a debit item in the BoP.
2. The Balance of Payments in India is compiled on an accrual basis.
3. An increase in a country's foreign assets is recorded as a credit item in the BoP.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. Any transaction that results in an inflow of foreign currency is recorded as a credit (+). An increase in a country's foreign liabilities, such as borrowing from abroad, leads to an inflow of foreign currency and is therefore recorded as a credit, not a debit.

Statement 2 is correct. The Balance of Payments is compiled on an accrual basis. This means transactions are recorded when economic ownership changes, regardless of when the actual payment is made.

Statement 3 is incorrect. Any transaction that results in an outflow of foreign currency is recorded as a debit (-). An increase in a country's foreign assets, such as an Indian company buying a factory abroad, leads to an outflow of foreign currency and is therefore recorded as a debit, not a credit.

Since only statement 2 is correct, the total number of correct statements is one.

Question 3

Consider the following statements regarding India's Balance of Trade (BOT):

1. Transactions related to monetary gold are recorded under the Balance of Trade.
2. For calculation purposes, India adheres to the IMF manual's recommendation of using the Free-On-Board (FOB) basis for valuing both imports and exports.
3. The Balance of Trade has historically been the primary contributor to surpluses in India's Current Account.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. The Balance of Trade (merchandise trade) includes transactions in non-monetary gold. Transactions involving monetary gold are accounted for under the Capital Account as part of changes in foreign exchange reserves.

Statement 2 is incorrect. While the IMF recommends valuing both exports and imports on a Free-On-Board (FOB) basis, India's official data records exports on an FOB basis but imports on a Cost, Insurance, and Freight (CIF) basis. This discrepancy is due to data collection practices.

Statement 3 is incorrect. India has historically run a trade deficit, meaning the value of imports has consistently been higher than the value of exports. Consequently, the Balance of Trade has been a major contributor to the deficit in India's Current Account, not a source of surplus.

Since all three statements are incorrect, the correct option is (d).

Question 4

Consider the following two statements:

Statement-I: In the Indian economy, the Current Account Deficit is typically smaller in magnitude than the Balance of Trade deficit.

Statement-II: India is the world's largest recipient of remittances and a net exporter of services, leading to a consistent surplus in the Balance of Invisibles.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is correct. The Current Account Balance is the sum of the Balance of Trade (visibles) and the Balance of Invisibles. Since India has a large deficit in the Balance of Trade but a significant surplus in the Balance of Invisibles, the latter partially offsets the former. This results in a Current Account Deficit that is numerically smaller than the Balance of Trade deficit, as shown in the provided data table. Statement-II is also correct. The text states that the balance of invisibles has always been positive because India is a net exporter of services and the world’s largest recipient of remittances. This surplus in invisibles is the precise reason why the overall Current Account Deficit is moderated, thus making Statement-II the correct explanation for Statement-I.

Question 5

With reference to the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India, consider the following statements:

1. The scheme is available to Hindu Undivided Families (HUFs) and partnership firms for making remittances abroad.
2. Remittances for the purchase of Foreign Currency Convertible Bonds (FCCBs) issued by Indian companies in the overseas secondary market are permissible under this scheme.
3. Capital account remittances to countries identified by the Financial Action Task Force (FATF) as 'non-cooperative' are explicitly prohibited.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The scheme is available to resident individuals but is explicitly not available to corporations, partnership firms, Hindu Undivided Families (HUFs), or trusts. Statement 2 is incorrect. The text clearly lists that remittances for the purchase of FCCBs issued by Indian companies in the overseas secondary market are not available under the LRS facility. Statement 3 is correct. The scheme explicitly prohibits capital account remittances, directly or indirectly, to countries identified by the FATF as 'non-cooperative countries and territories'.

Question 6

With reference to the management of a Balance of Payments (BoP) imbalance, consider the following statements:

1. Devaluation of the domestic currency is undertaken to reduce exports and stimulate the demand for imports.
2. Credit control measures are implemented to increase the money supply, thereby boosting aggregate demand.
3. Imposing restrictions on imports through licensing and quotas are considered structural reforms to put the economy on a competitive path.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. Devaluation of the domestic currency is a measure intended to stimulate exports and reduce the demand for imports, not the other way around. Statement 2 is incorrect. Credit control measures are used to decrease the money supply in the economy. This reduction in money supply helps to lower purchasing power and consequently results in a decrease, not an increase, in aggregate demand. Statement 3 is incorrect. While import control measures like licensing and quotas are used to manage BoP, they are distinct from structural reforms. Structural reforms are broader measures aimed at making the economy more competitive, whereas import restrictions are a specific type of import control measure.

Question 7

Consider the following statements:

Statement-I: To manage a Balance of Payments (BoP) imbalance, the RBI may implement credit control measures.

Statement-II: The primary objective of such credit control measures is to decrease the aggregate demand in the economy by reducing the money supply and purchasing power.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is correct. The text explicitly mentions that measures taken by the Government/RBI to overcome BoP imbalance include credit control measures. Statement-II is also correct. The text explains the mechanism of these measures: they are intended to decrease the money supply, which in turn helps to reduce purchasing power and thereby results in a decrease in aggregate demand. Since Statement-II provides the precise logic for why the action in Statement-I is taken, it serves as the correct explanation for Statement-I.

Question 8

With reference to foreign investments in India, consider the following statements:

1. Any foreign investment in an unlisted Indian company, irrespective of the stake percentage, is treated as Foreign Portfolio Investment.
2. If a foreign investment, initially classified as FDI in a listed company, sees its stake fall below 10%, it is reclassified as Foreign Portfolio Investment.
3. Foreign nationals, who are not NRIs or OCIs, are permitted to invest in Indian partnership firms on a non-repatriation basis.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. Any foreign investment in an unlisted Indian company is treated as Foreign Direct Investment (FDI), regardless of the stake percentage.

Statement 2 is incorrect. An investment classified as FDI retains its character as FDI even if the holding later falls below the 10 percent threshold. It is not reclassified as Foreign Portfolio Investment (FPI).

Statement 3 is incorrect. In India, only Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) are permitted to invest in partnership or proprietorship firms. Foreign nationals who are not NRIs or OCIs are not allowed to invest in such entities.

Question 9

Consider the following statements:

Statement-I: In the context of India's capital account, there is a lack of uniform classification for Depository Receipts (like ADRs/GDRs) among different government bodies.

Statement-II: The Reserve Bank of India (RBI) classifies ADRs/GDRs as Foreign Direct Investment (FDI), whereas the Department for Promotion of Industry and Internal Trade (DPIIT) treats them as Portfolio Investment.

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. The provided text highlights a divergence in how Depository Receipts are treated. It states that the RBI and DPIIT classify them differently, indicating a lack of uniform classification.

Statement-II is incorrect. The statement reverses the classifications mentioned in the text. According to the passage, the RBI publishes ADRs/GDRs as Portfolio Investment. In contrast, FEMA and the Department for Promotion of Industry and Internal Trade (DPIIT) treat ADR/GDR as FDI. Therefore, Statement-II incorrectly assigns the classifications to the respective bodies.

Question 10

Consider the following statements regarding the factors that affect Foreign Direct Investment (FDI) inflows:

1. A higher rate of inflation in a country generally leads to increased FDI inflows as it reflects internal economic stability.
2. A lower real rate of interest tends to decrease FDI flows as it indicates lower returns on investment projects.
3. Stricter fiscal policies, such as higher tax rates, generally enhance a country's trade openness and attract more FDI.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. The text states that a controlled or low inflation reflects internal economic stability, making it suitable for attracting foreign investments. It clarifies that as inflation increases, the net benefit of investment decreases.

Statement 2 is incorrect. The text mentions that a lower real rate of interest tends to increase FDI flows. This is because it makes it easier and cheaper for firms to finance their investment projects, not decrease them.

Statement 3 is incorrect. The text suggests that strict fiscal policies, like higher tax rates, might make it unprofitable for investors to invest, thereby deterring FDI. It does not state that such policies enhance trade openness or attract FDI.

Question 11

With reference to bank accounts for non-residents in India, consider the following statements:

1. The interest earned on a Non-Resident External (NRE) Rupee Account is taxable in India.
2. A Foreign Currency Non-Resident (Bank) Account (FCNR-B) can be opened as a savings account.
3. A foreign tourist visiting India is permitted to open only a Non-Resident Ordinary (NRO) Rupee Account.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The text explicitly states that the interest earned on an NRE account is tax-free.

Statement 2 is incorrect. The text specifies that an FCNR-B account can be held only in the form of term or fixed deposits, not as a savings account.

Statement 3 is correct. The text clearly mentions that a foreign tourist visiting India can open only an NRO account for bona fide transactions in Indian Rupees.

Question 12

Consider the following statements regarding Autonomous and Accommodating items in the Balance of Payments (BOP) account:

1. Autonomous transactions are undertaken primarily to restore the BOP balance.
2. Accommodating transactions are referred to as ‘below the line’ items.
3. All transactions recorded in the current and capital accounts are examples of autonomous items.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. It incorrectly describes autonomous transactions. It is accommodating transactions that are undertaken to cover a deficit or surplus in the balance of payments. Autonomous transactions are independent economic transactions undertaken for motives such as profit maximization.

Statement 2 is correct. Autonomous transactions are recorded as 'above the line' items. The resulting BOP surplus or deficit is settled by accommodating transactions, which are therefore referred to as 'below the line' items.

Statement 3 is incorrect. The use of the word 'All' makes the statement inaccurate. While most transactions in the current and capital accounts are autonomous, official reserve transactions, which are a key example of accommodating items, are also part of the overall BOP accounts (specifically within the capital or financial account).

Since only one statement (Statement 2) is correct, the correct option is 'a'.

Question 13

Consider the following statements regarding India's external sector:

1. Within India's foreign exchange reserves, both Special Drawing Rights (SDRs) and Foreign Currency Assets (FCAs) are held under the direct custody of the Ministry of Finance.
2. A negative Net International Investment Position (NIIP) signifies that a nation is a creditor nation.
3. The computation of a country's external liabilities for its NIIP includes both government and private sector debt.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The Reserve Bank of India (RBI), as the country's central bank, is the custodian of India's foreign exchange reserves. These reserves, which include Foreign Currency Assets (FCAs), Gold, and Special Drawing Rights (SDRs), are managed by the RBI as stipulated by the RBI Act, 1934, not the Ministry of Finance. Statement 2 is incorrect. A negative Net International Investment Position (NIIP) indicates that a country's total external liabilities (what it owes to the rest of the world) exceed its total external assets (what the rest of the world owes to it). Such a country is a net debtor, not a creditor nation. Statement 3 is correct. The NIIP is a comprehensive stock measure of a country's external financial health. Its calculation of external liabilities includes all financial obligations to non-residents, which covers debt owed by both the government (public sector) and private entities. Therefore, only one statement is correct.

Question 14

Consider the following statements regarding the J-Curve theory:
1. Immediately following a currency depreciation, a country's trade balance is expected to improve due to the lower price of its exports.
2. The theory posits that the initial worsening of the trade balance is primarily because the value of imports rises due to higher prices, and this effect is greater than the initial reduction in import volume.
3. In the long run, the trade balance is expected to shift towards a larger surplus or a smaller deficit compared to the pre-depreciation level.

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is incorrect. The J-Curve theory states that a country's trade balance will initially worsen following a currency depreciation, not improve. Statement 2 is correct. The initial deterioration of the trade balance occurs because higher prices on imports have a more significant immediate impact than the change in the volume of imports. Statement 3 is correct. Over time, as export volumes increase due to lower prices and import volumes decrease due to higher costs, the trade balance eventually improves, potentially leading to a larger surplus or a smaller deficit than before the depreciation.

Question 15

Consider the following statements regarding India's external sector:
1. Both NRI deposits and Special Drawing Rights (SDRs) are classified as components of India's external debt.
2. India's external debt data is released on a quarterly basis by the Ministry of Finance.
3. In India's foreign exchange reserves, Gold Reserves constitute the largest component by value, followed by Foreign Currency Assets (FCA).

How many of the above statements are correct?

Accepted Answer

None. To determine the correct number of statements, let's analyze each one:
1. Statement 1 is incorrect. While Non-Resident Indian (NRI) deposits are a component of India's external debt, Special Drawing Rights (SDRs) are a component of India's foreign exchange reserves, not its external debt.
2. Statement 2 is incorrect. The data on India's external debt is released on a quarterly basis by the Reserve Bank of India (RBI), not the Ministry of Finance.
3. Statement 3 is incorrect. Foreign Currency Assets (FCA) are the largest component of India's foreign exchange reserves, typically accounting for the vast majority of the total. Gold reserves are the second-largest component.

Since all three statements are incorrect, the correct option is 'd', indicating that none of the statements are correct.

Question 16

Consider the following two statements:
Statement-I: The twin deficit hypothesis suggests a correlation where economies with a large fiscal deficit often experience a large current account deficit.
Statement-II: The economic scenario of China, which has experienced a long-term fiscal surplus and a current account surplus, is cited as an example of a financial position opposite to that described by the twin deficit hypothesis.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation of Statement-I.. Statement-I correctly defines the twin deficit hypothesis, which posits a correlation between a fiscal deficit (budget deficit) and a current account deficit. Statement-II is also correct; it describes the opposite scenario of twin surpluses (fiscal surplus and current account surplus), as experienced by China, which is considered a better financial position. Statement-II serves as a correct explanation for Statement-I by providing a real-world contrasting example that helps to illustrate and validate the concept of the twin deficit phenomenon.

Question 17

With reference to India's 1991 Balance of Payments (BoP) crisis and its aftermath, consider the following statements:

1. The crisis was primarily triggered by a sudden surge in exports that could not be matched by import capacity.
2. A substantial outflow of deposits held by non-resident Indians was a key factor that aggravated the crisis.
3. The devaluation of the rupee during the recovery phase was intended to make imports cheaper and thereby control domestic inflation.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The 1991 BoP crisis was triggered by a sharp increase in India's import bill, particularly due to a rise in international crude oil prices following the Gulf War, which depleted foreign exchange reserves. It was not caused by a surge in exports. Statement 2 is correct. A significant outflow of deposits held by non-resident Indians during 1990-91 contributed to the depletion of foreign exchange reserves and exacerbated the crisis. Statement 3 is incorrect. The devaluation of the rupee makes domestic goods cheaper for foreigners and foreign goods more expensive for domestic residents. The primary goal was to encourage Indian exporters, as their earnings in foreign currency would convert to more Indian Rupees, thus boosting exports and improving the current account balance. Devaluation makes imports more expensive, not cheaper.

Question 18

Consider the following statements regarding the factors contributing to India's Balance of Payments (BoP) situation in the post-reform period (1991-92 onwards):

1. An increase in the Balance of Invisibles, driven by software exports and private remittances, has been a significant positive contributor.
2. Net External Commercial Borrowings (ECB) have consistently shown a positive net inflow in every year since the 1991 reforms.
3. Increased Non-Resident Indian (NRI) deposits, spurred by special incentives declared by the Ministry of Finance, have been a key component under the banking capital head.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is correct. The post-reform period has seen a satisfactory trend in the BoP, partly due to a rise in the surplus on the Balance of Invisibles, which is supported by growth in software service exports and private transfer receipts from abroad. Statement 2 is incorrect. While Net ECB has been a factor, it has not been consistently positive. For instance, in the period between 2014 and 2019, net ECB was negative, indicating a net outflow. The use of the word 'consistently' makes the statement false. Statement 3 is incorrect. While increased NRI deposits have been a positive factor, the special incentives for them were declared by the Reserve Bank of India (RBI), not the Ministry of Finance. This is an incorrect attribution of institutional responsibility.

Question 19

Consider the following statements based on the provided data for India's Balance of Payments:

Statement-I: In the fiscal year 2023-24, India's Current Account Balance was negative despite a significant surplus in the Balance of Invisibles.

Statement-II: A negative Current Account Balance occurs when the deficit in the Balance of Trade is larger in magnitude than the surplus in the Balance of Invisibles.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is correct. The data for 2023-24 shows a Balance of Invisibles surplus of US$ 218,778 million, yet the Current Account Balance was negative at US$ -23,287 million. Statement-II is also correct. The Current Account Balance is the sum of the Balance of Trade and the Balance of Invisibles. If the trade deficit (a negative number) is greater in absolute value than the invisibles surplus (a positive number), the resulting sum will be negative. For 2023-24, the trade deficit was -242,065 million, which is larger in magnitude than the invisibles surplus of +218,778 million, leading to a negative Current Account Balance. Therefore, Statement-II provides the precise mathematical and conceptual reason for the situation described in Statement-I.

Question 20

With reference to the depreciation of the Indian Rupee, consider the following statements:
1. A depreciating rupee makes Indian exports more competitive in the global market.
2. It reduces the rupee-denominated cost of servicing External Commercial Borrowings (ECBs) in dollars.
3. It can lead to imported inflation, particularly for essential commodities like crude oil.
How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct; a weaker rupee means foreigners pay less in their own currency for Indian goods, boosting export competitiveness. Statement 2 is incorrect; servicing a dollar-denominated loan requires more rupees after depreciation, thus increasing the cost burden (Directional Inversion). Statement 3 is correct; imports like crude oil become more expensive in rupee terms, pushing up domestic prices.

Question 21

While a country's trade deficit is often viewed with concern, it is not always detrimental to the economy. In this context, consider the following statements:
Statement-I: A persistent trade deficit can be viewed as an opportunity if it is primarily driven by imports of capital goods and technology.
Statement-II: Such imports enhance the economy's long-term productive capacity and can reduce future import dependence.

Accepted Answer

Both statements are correct; Statement-II is the correct explanation for Statement-I.. Statement-I is correct. A trade deficit is not inherently negative. When a deficit is caused by the import of capital goods (like machinery, equipment) and technology, it is often considered a 'good deficit'. This is because these imports are investments that build the country's future productive capacity. Statement-II is also correct and provides the precise economic rationale for Statement-I. By importing capital goods, an economy can produce more goods and services domestically in the long run, potentially leading to increased exports and a reduction in the need for certain imports, thus enhancing competitiveness and reducing future import dependence. Therefore, Statement-II is the correct explanation for Statement-I.

Question 22

In a situation of significant rupee depreciation and a widening trade deficit, consider the following policy responses that may be undertaken by Indian authorities:
1. The Reserve Bank of India selling foreign exchange reserves.
2. The Government of India increasing customs duties on non-essential imports.
3. The Monetary Policy Committee increasing the policy repo rate.
Which of the statements given above are correct policy responses to address this situation?

Accepted Answer

1, 2 and 3. All three statements represent valid and standard policy responses to address rupee depreciation and a widening trade deficit.

Statement 1 is correct. When the RBI sells foreign exchange (e.g., US dollars) from its reserves, it increases the supply of dollars in the forex market. According to the principles of supply and demand, this increased supply helps meet the existing demand for dollars, thereby easing the downward pressure on the rupee and helping to curb its depreciation.

Statement 2 is correct. This is a fiscal policy measure. By increasing customs duties, the Government makes imported goods more expensive. This price increase is intended to reduce the domestic demand for these imports, which in turn reduces the outflow of foreign currency required to pay for them. A reduction in the import bill helps to narrow the trade deficit.

Statement 3 is correct. This is a monetary policy measure. An increase in the policy repo rate by the MPC leads to higher interest rates in the economy. Higher interest rates make Indian financial assets (like bonds) more attractive to foreign investors seeking higher returns. This encourages capital inflows (e.g., Foreign Portfolio Investment), which increases the demand for the rupee in the forex market, thus helping it to strengthen or appreciate.

Question 23

With reference to Foreign Direct Investment (FDI) in India, consider the following statements:
1. FDI is primarily characterized by investment in financial assets like stocks and bonds for short-term speculative gains.
2. All FDI proposals in India are processed through either the automatic route or the government approval route.
3. An investment by a foreign entity in 5% of the equity capital of a listed Indian company is classified as FDI.
How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. It describes Foreign Portfolio Investment (FPI), which involves investing in financial assets for short-term gains without significant control. FDI, in contrast, implies establishing a lasting interest and a degree of influence over the management of an enterprise. Statement 2 is correct. India's policy on foreign investment stipulates that FDI can enter the country through two routes only: the automatic route, where no prior government approval is needed, and the government route, which requires prior approval from the concerned ministry or department. Statement 3 is incorrect. As per the official definition adopted in India, an investment by a foreign entity is classified as FDI if it is in an unlisted Indian company OR if it is 10% or more of the post-issue paid-up equity capital of a listed Indian company. An investment below this 10% threshold in a listed company is treated as Foreign Portfolio Investment (FPI).

Question 24

Consider the following statements regarding Foreign Direct Investment (FDI) in India:
Statement-I: The government has progressively liberalized FDI norms to boost capital formation in the manufacturing sector.
Statement-II: Consequently, the share of the services sector in total FDI equity inflows has consistently declined in recent years.

Accepted Answer

Statement-I is correct; Statement-II is incorrect.. Statement-I is a correct reflection of India's policy direction, with initiatives like 'Make in India' and PLI schemes aimed at boosting manufacturing through FDI. Statement-II is incorrect. While manufacturing FDI is being promoted, the services sector continues to attract a significant, albeit fluctuating, share of FDI. Economic data does not support a 'consistent decline'; such absolute terms are often incorrect in trend-based questions.

Question 25

With reference to the Foreign Direct Investment (FDI) policy in India, consider the following statements:
1. The Department for Promotion of Industry and Internal Trade (DPIIT) is the nodal agency for formulating FDI policy.
2. FDI is prohibited in chit funds but is permitted in the manufacturing of tobacco products.
3. Investment from an entity of a country sharing a land border with India requires prior government approval.
Which of the statements given above are correct?

Accepted Answer

1 and 3 only. Statement 1 is correct. The Department for Promotion of Industry and Internal Trade (DPIIT), under the Ministry of Commerce and Industry, is the nodal department for the formulation of the policy on Foreign Direct Investment (FDI). Statement 2 is incorrect. FDI is prohibited in a few sectors. The prohibited list includes both chit funds and the manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes. Therefore, the assertion that it is permitted in the manufacturing of tobacco products is incorrect. Statement 3 is correct. As per the extant FDI policy, an entity of a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route. This measure was taken to curb opportunistic takeovers of Indian companies.

Question 26

With reference to the Special Rupee Vostro Accounts (SRVAs) mechanism for international trade settlement, consider the following statements:
1. Authorised Dealer (AD) Category-I banks in India can open SRVAs for correspondent banks of a partner country without prior approval from the Reserve Bank of India.
2. All payments for exports and imports settled through the SRVA mechanism must be denominated and invoiced in Indian Rupee (INR).
3. Surplus balances held in SRVAs can be utilized for permissible capital and current account transactions, including investments in government securities.
How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is incorrect. As per the RBI's framework for international trade settlement in Indian Rupees (RBI/2022-2023/90 A.P. (DIR Series) Circular No. 10), Authorised Dealer (AD) Category-I banks are required to seek prior approval from the Foreign Exchange Department, Central Office of the Reserve Bank of India before opening a Special Rupee Vostro Account (SRVA). This regulatory step is mandatory to ensure proper oversight. Statement 2 is correct. A fundamental feature of this settlement mechanism is that all invoicing, payment, and settlement of exports and imports must be in Indian Rupees (INR), which is key to promoting the use of the domestic currency and reducing reliance on hard currencies. Statement 3 is correct. The provisions governing SRVAs permit the utilization of surplus balances for a range of permissible transactions. This explicitly includes payments for projects and investments, as well as investments in Government Treasury Bills and Government securities, subject to FEMA and other statutory provisions. This encourages the productive deployment of rupee funds held in these accounts.

Question 27

Consider the following statements regarding recent measures for Special Rupee Vostro Accounts (SRVAs):
Statement-I: Recent RBI measures aim to enhance the appeal of holding surplus balances in SRVAs for foreign entities.
Statement-II: Permitting investment of surplus SRVA balances in government securities offers a return on otherwise idle rupee funds.

Accepted Answer

Both statements are correct; Statement-II explains Statement-I.. Statement-I is correct. Recent measures by the RBI, such as simplifying the account opening process and allowing investment of surplus funds, are intended to make the SRVA mechanism more attractive to foreign entities. This encourages greater participation in rupee-based trade settlements, which is a step towards the internationalisation of the Rupee. Statement-II is also correct. By allowing surplus SRVA balances to be invested in government securities, these funds are transformed from non-interest-bearing idle assets into productive, yield-generating investments. This provides a direct financial incentive for foreign entities to hold and use Indian Rupees. Statement-II provides the direct economic rationale for Statement-I; allowing investments (Statement-II) is a key mechanism that enhances the appeal of holding rupee balances (Statement-I).

Question 28

Consider the following statements regarding the Special Rupee Vostro Account (SRVA) mechanism for international trade settlement:
1. Non-resident entities holding SRVAs are permitted to invest their surplus rupee balances in Indian government securities.
2. The SRVA mechanism facilitates trade settlement by allowing Indian banks to open special rupee accounts in foreign countries.
3. As per recent policy changes, authorised dealer banks must obtain prior approval from the Ministry of Finance to open SRVAs.
Which of the statements given above is/are correct?

Accepted Answer

1 only. Statement 1 is correct. The RBI has allowed non-resident entities to invest surplus balances from their SRVAs into Central government securities and Treasury Bills. This measure aims to make holding rupees more attractive and encourages the productive deployment of surplus funds. Statement 2 is incorrect. This is a classification swap. A Vostro account ('your account with us') is an account that a foreign bank opens with an Indian bank in local currency (INR). The statement incorrectly describes a Nostro account ('our account with you'), which is an account an Indian bank would hold in a foreign bank in foreign currency. The SRVA mechanism uses Vostro accounts. Statement 3 is incorrect. The recent policy change has removed the requirement for authorised dealer banks to seek prior approval from the RBI, not instituted a new approval process with the Ministry of Finance. This deregulation is intended to speed up the operationalisation of rupee-based trade settlements.

Question 29

With reference to the news (2025-07-14) regarding 'Declining Household Savings & Rising Liabilities', consider the following statements:
1. A compositional shift from financial savings towards physical assets has been observed.
2. Household financial liabilities as a percentage of GDP have shown a decreasing trend.
3. Net financial savings are calculated as gross financial savings minus household borrowings.
How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct; recent data indicates households are preferring physical assets like real estate over financial instruments. Statement 2 is incorrect; the core issue highlighted in the news is the *rising* trend in household liabilities (debt). This is a directional inversion trap. Statement 3 is correct; this is the standard definition used by the RBI to calculate net financial savings.

Question 30

Considering the recent trends in India's household savings, consider the following statements:
Statement-I: A sustained decline in net household financial savings can adversely impact private corporate investment.
Statement-II: Household savings are the primary source of funds for government securities, not for corporate bonds and equities.

Accepted Answer

Statement-I is correct, but Statement-II is incorrect.. Statement-I is correct. Household savings are a critical source of capital for the economy. When channeled through the banking system, they provide the funds that banks lend to corporations for investment. A decline in these savings reduces the pool of available capital. Statement-II is incorrect. It creates a false dichotomy. While household savings do fund government securities (G-Secs), they are also a major source of funds for the entire financial market, including corporate bonds and equities, through banks, mutual funds, and direct investments.

Question 31

With reference to the trends in Household Savings and Liabilities in India, consider the following statements:
1. Investments in mutual funds and insurance are classified under household physical savings.
2. The Reserve Bank of India (RBI) releases periodic data on household financial assets and liabilities.
3. A significant driver of the recent trend of increasing household debt has been the growth in unsecured personal loans.
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Accepted Answer

2 and 3 only. Statement 1 is incorrect. Household savings are broadly categorized into physical and financial savings. Physical savings include investments in tangible assets like real estate, gold, and silver. Financial savings include investments in financial instruments like bank deposits, mutual funds, stocks, and insurance policies. Therefore, mutual funds and insurance are part of financial savings, not physical savings. Statement 2 is correct. The Reserve Bank of India (RBI) is the primary authority that compiles and periodically releases comprehensive data on the financial assets and liabilities of the household sector in India. Statement 3 is correct. Recent economic data and analysis indicate that a major contributor to the rise in household liabilities (debt) has been a surge in borrowing through unsecured personal loans, often used for consumption purposes.

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