Question 1

Consider the following statements regarding factors that influence exchange rates:

1. A country experiencing a consistently higher inflation rate than its trading partners typically sees an appreciation in its currency.
2. A significant rise in the domestic interest rates of a country often leads to a depreciation of its currency.
3. Countries with low current account deficits tend to have stronger currencies compared to those with high deficits.

How many of the above statements are correct?

Accepted Answer

Only one. Let's analyze each statement:

*   **Statement 1 is incorrect.** A country with a consistently higher inflation rate sees the purchasing power of its currency erode. Its exports become more expensive and imports cheaper, leading to a decrease in demand for its currency and causing it to **depreciate**, not appreciate.
*   **Statement 2 is incorrect.** A significant rise in domestic interest rates offers higher returns to investors compared to other countries. This attracts foreign capital, increasing the demand for the domestic currency and causing it to **appreciate**, not depreciate.
*   **Statement 3 is correct.** A low current account deficit (or a surplus) indicates that a country's external finances are stable and it is not overly dependent on foreign capital to finance its consumption and investment. This financial stability inspires confidence and tends to strengthen its currency. Conversely, a high deficit can signal economic imbalances and weaken the currency.

Since only one statement (Statement 3) is correct, the correct option is 'a'.

Question 2

Consider the following statements regarding exchange rate systems:

1. In a Fixed Exchange Rate system, the rate is determined by the forces of demand and supply, with the Government only intervening to restrict fluctuations within a certain range.
2. A key advantage of a Floating Exchange Rate system is that it eliminates speculative activities in international transactions.
3. India follows a Managed Float system, also known as Dirty Float, where the Central Bank (RBI) intervenes in the international money market.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The description provided is for a Managed Float system. In a Fixed Exchange Rate system, the rate is explicitly fixed by the Government, not determined by market forces. Statement 2 is incorrect. The elimination of speculative activities is an advantage associated with a Fixed Exchange Rate system due to its stability. Floating systems can be susceptible to speculation. Statement 3 is correct. India follows a Managed Float system, where the RBI intervenes in the forex market to manage exchange rate volatility. This system is also referred to as a Dirty Float.

Question 3

Consider the following two statements:

Statement-I: A Managed Float exchange rate system is considered a hybrid regime because it combines features of both fixed and flexible systems.

Statement-II: Under a Managed Float system, the central bank's intervention aims to fix the exchange rate at a predetermined level, thereby eliminating all market-driven fluctuations and speculative activities.

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

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. A Managed Float is a hybrid system because it allows the exchange rate to be determined by market forces (a feature of flexible systems) while also involving central bank intervention to manage volatility (a feature aimed at stability, similar to the goal of fixed systems). Statement-II is incorrect. It misrepresents the role of the central bank in a Managed Float. The central bank does not 'fix' the rate or 'eliminate' all fluctuations; it intervenes to 'restrict' fluctuations within a certain range. The rate is still allowed to float and is determined by demand and supply over a period. Fixing the rate is characteristic of a Fixed Exchange Rate system, not a Managed Float.

Question 4

With reference to the policy of sterilisation by the RBI, consider the following statements:
1. Under this policy, the RBI sells US Dollars in the market to absorb excess rupee liquidity.
2. The primary objective of this intervention is to prevent the rapid appreciation of the Indian rupee.
3. To complete the process, the RBI purchases Government Securities (G-Secs) to inject liquidity back into the economy.

How many of the above statements are correct?

Accepted Answer

Only one. Sterilisation is an RBI intervention to counteract the effects of large capital inflows on the domestic money supply and exchange rate.

*   **Statement 1 is incorrect.** To counter rupee appreciation from capital inflows, the RBI *buys* foreign currency (like US Dollars), not sells it. This action *injects* rupee liquidity into the market, it does not absorb it.
*   **Statement 2 is correct.** Large capital inflows increase the supply of foreign currency, causing the domestic currency (rupee) to appreciate. A rapid appreciation can harm export competitiveness. Therefore, the primary objective of the intervention is to manage the exchange rate and prevent rapid appreciation.
*   **Statement 3 is incorrect.** The initial purchase of foreign currency injects excess liquidity. To 'sterilise' or neutralise this, the RBI then *sells* Government Securities (G-Secs) through Open Market Operations. This action absorbs the excess rupee liquidity from the banking system, it does not inject it.

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

Question 5

Consider the following statements regarding the convertibility of the Indian Rupee:

Statement-I: Full convertibility on the current account in India means that rupees can be converted into any foreign currency for all current account transactions without any prior approval.

Statement-II: For certain transactions, such as foreign currency payments to artists for a cultural tour, prior approval from the Reserve Bank of India is mandatory.

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

Accepted Answer

Both Statement-I and Statement-II are incorrect.. Statement-I is incorrect. While India has current account convertibility, it is not absolute. The Foreign Exchange Management (Current Account Transactions) Rules, 2000, outline restrictions. Certain transactions are prohibited (Schedule I), while others require prior approval or are subject to limits, such as remittances under the Liberalised Remittance Scheme (LRS). The use of the word 'all' in the statement makes it factually wrong.

Statement-II is incorrect. While prior approval is needed for remittances for cultural tours, this approval is required from the Central Government (Ministry of Finance), not the Reserve Bank of India. The statement incorrectly identifies the approving authority.

Since both Statement-I and Statement-II are factually incorrect, the correct option is (d).

Question 6

Consider the following statements regarding Capital Account Convertibility (CAC) in India:
1. The Tarapore Committee recommended reducing the fiscal deficit to 3.5% of GDP as a precondition for full CAC.
2. A potential benefit of full convertibility is the insulation of the domestic economy from global vulnerabilities and contagion effects.
3. Following the recommendations of the Tarapore Committees, the Indian Rupee is now fully convertible on the capital account.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is correct. The text explicitly lists reducing the fiscal deficit to 3.5 percent of GDP as one of the preconditions suggested by the Tarapore Committee. Statement 2 is incorrect. This statement swaps a limitation with a benefit. The text identifies exposure to 'global vulnerabilities' and the 'contagion effect' as limitations or risks of full convertibility, not potential benefits. Statement 3 is incorrect. The text clearly states that the recommendations of the Tarapore Committees are 'yet to be adopted' and that the Rupee is currently only 'partially convertible on the capital account'.

Question 7

Consider the following statements regarding currency exchange rate mechanisms:

1. Devaluation is a phenomenon typically associated with a flexible exchange rate system where currency value falls due to market forces.
2. Depreciation is a deliberate action by a government to reduce the value of its currency, usually under a fixed exchange rate system.
3. An increase in the exchange rate from ₹75 per $ to ₹80 per $ signifies a depreciation of the Rupee.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. Devaluation is a deliberate, official downward adjustment of a currency's value by the government, which is a feature of a fixed exchange rate system. A fall in currency value due to market forces in a flexible exchange rate system is termed depreciation. Statement 2 is incorrect. Depreciation is the fall in a currency's value due to market forces (demand and supply) under a flexible exchange rate system. The statement incorrectly describes devaluation. Statement 3 is correct. Depreciation of the domestic currency means that more of it is required to purchase a unit of foreign currency. A change from ₹75 per $ to ₹80 per $ means the Rupee has weakened or lost value relative to the dollar, which is the definition of depreciation. Since only statement 3 is correct, the total number of correct statements is one.

Question 8

Consider the following statements regarding exchange rate indices:

1. An increase in the Real Effective Exchange Rate (REER) of a country indicates that its exports are becoming cheaper, thereby improving its international competitiveness.
2. The Nominal Effective Exchange Rate (NEER) is adjusted for inflation to provide a better measure of a currency's international competitiveness.
3. An increasing difference between a country's NEER and REER suggests that its domestic inflation rate is higher than that of its trading partners.

How many of the above statements are correct?

Accepted Answer

Only one. The evaluation of the statements is as follows:

*   **Statement 1 is incorrect.** An increase (appreciation) in the Real Effective Exchange Rate (REER) implies that a country's goods have become more expensive relative to its trading partners. This makes its exports less competitive and imports more attractive, thus harming, not improving, its international competitiveness.
*   **Statement 2 is incorrect.** The Nominal Effective Exchange Rate (NEER) is a weighted average of bilateral nominal exchange rates and does not account for inflation. It is the REER that is the NEER adjusted for the inflation differential between the home country and its trading partners, making REER the better measure of international competitiveness.
*   **Statement 3 is correct.** The REER is derived from the NEER by adjusting for relative price levels. If a country's domestic inflation is consistently higher than that of its trading partners, its REER will rise more rapidly than its NEER, causing a widening divergence between the two indices.

Since only one statement (Statement 3) is correct, the correct option is (a).

Question 9

With reference to the International Investment Position (IIP), consider the following statements:

Statement-I: The quarterly data on India's International Investment Position is compiled and published by the International Monetary Fund (IMF).
Statement-II: A negative Net IIP value for a country indicates that it is a net debtor nation, meaning its total external liabilities exceed its total external assets.

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

Accepted Answer

Statement-I is incorrect but Statement-II is correct. Statement-I is incorrect. While the IMF publishes the global IIP report, the specific IIP data for India is compiled and published quarterly by the Reserve Bank of India (RBI), not the IMF. Statement-II is correct. The Net IIP is the difference between a country's external assets and external liabilities. A negative value signifies that liabilities are greater than assets, which means the country is a net debtor to the rest of the world.

Question 10

Consider the following statements regarding foreign exchange reserve adequacy:

1. The Guidotti-Greenspan Rule, a modern approach to reserve adequacy, suggests that a country's forex reserves should be equivalent to a few months of its imports.
2. The traditional rule of holding reserves equivalent to a few months of imports has gained more relevance with the increasing importance of capital account transactions.
3. The Guidotti-Greenspan Rule postulates that a country's foreign exchange reserves should cover at least 100 percent of its short-term external debt obligations.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The Guidotti-Greenspan Rule is related to short-term external debt, not the value of imports. The idea of reserves being equivalent to a few months of imports is the traditional rule. Statement 2 is incorrect. The text explicitly states that with the increasing importance of capital account transactions, the traditional approach of linking reserves to imports is now becoming less relevant. Statement 3 is correct. This is the precise definition of the Guidotti-Greenspan Rule, which states that reserves should cover at least 100 percent of short-term external debt obligations for about one year.

Question 11

Consider the following statements regarding the 'Dutch Disease' phenomenon:

1. It describes a paradoxical situation where good economic news, such as the discovery of oil reserves, can harm a country's broader economy.
2. The mechanism involves a large influx of foreign currency, leading to a significant depreciation of the domestic currency.
3. A key consequence is that the appreciation of the domestic currency makes the country's manufacturing exports more competitive internationally.

How many of the above statements are correct?

Accepted Answer

Only one. To determine the correct option, let's analyze each statement:

*   **Statement 1 is correct.** The 'Dutch Disease' is an economic concept that describes the paradox where a sudden positive event, like the discovery of large natural resource reserves, can have a detrimental effect on the wider economy, particularly the manufacturing sector.
*   **Statement 2 is incorrect.** The influx of foreign currency to purchase the new resource increases demand for the domestic currency. This leads to a significant *appreciation* (strengthening) of the domestic currency, not depreciation (weakening).
*   **Statement 3 is incorrect.** The appreciation of the domestic currency, as explained above, makes the country's other exports (like manufactured goods) more expensive for foreign buyers. This harms the manufacturing sector by making its exports *less competitive* internationally, not more competitive.

Since only one statement (Statement 1) is correct, option 'a' is the correct answer. Consequently, options 'b' (Only two) and 'c' (All three) are incorrect because more than one statement is false. Option 'd' (None) is incorrect because Statement 1 is true.

Question 12

Consider the following statements:

Statement-I: A Vostro account is an account held by a domestic bank in its local currency for a foreign bank.

Statement-II: The terms Vostro and Nostro refer to two separate and distinct bank accounts that describe the same transaction from the perspectives of the two different banks involved.

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. A Vostro account is an account that a domestic bank holds, denominated in the local currency, on behalf of a foreign correspondent bank. The term 'Vostro' is Latin for 'yours', signifying the foreign bank's money held by the domestic bank. Statement-II is incorrect. The terms Vostro and Nostro refer to the same single account, but from different perspectives. From the perspective of the domestic bank holding the funds, it is a Vostro ('your') account. From the perspective of the foreign bank whose money is being held, it is a Nostro ('our') account. They are not two separate accounts.

Question 13

Consider the following statements regarding international currency dynamics:

1. One of the essential pre-requisites for the internationalisation of a currency is its stability in value.
2. The process of de-dollarisation involves countries actively reducing their holdings of US Dollars in their foreign exchange reserves.
3. A key benefit of a country successfully internationalising its currency is an enhanced ability to manipulate global financial systems to its advantage.

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct. For a currency to be widely accepted for international transactions and held as a reserve asset, its value must be stable and predictable, which is a fundamental pre-requisite for internationalisation. Statement 2 is correct. De-dollarisation is the process of reducing the dominance of the US Dollar, and a key strategy for countries pursuing this is to diversify their foreign exchange reserves by decreasing the proportion held in US Dollars. Statement 3 is incorrect. The potential benefits of internationalisation include savings on forex reserves, improved foreign trade, and better international capital flows. The ability to manipulate the global financial system is cited as a criticism of the US Dollar's current dominance and a reason for other countries to pursue de-dollarisation, not a benefit of internationalising their own currency.

Question 14

Consider the following statements regarding India's foreign exchange laws:
1. The Foreign Exchange Regulation Act (FERA), 1973, was enacted with the primary aim of promoting foreign trade and encouraging the foreign exchange market in India.
2. The Foreign Exchange Management Act (FEMA), 1999, was promulgated in response to a severe foreign exchange crisis to conserve the country's foreign exchange resources.
3. FEMA is considered more liberal in its approach to foreign exchange transactions and international trade facilitation compared to its predecessor, FERA.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The primary aim of FERA, 1973, was to conserve foreign exchange resources during a period of crisis, not to promote trade. The promotion of foreign trade and the foreign exchange market was the aim of FEMA, 1999. Statement 2 is incorrect. It reverses the context of the two acts. FERA was promulgated in response to a severe foreign exchange crisis, whereas FEMA was enacted in a more liberalized economic environment to replace the restrictive FERA. Statement 3 is correct. FEMA is designed to be more liberal, facilitating international trade with fewer restrictions than the stringent FERA regime.

Question 15

Consider the following statements regarding institutions related to foreign trade in India:
1. The Export-Import Bank of India (EXIM Bank) is the principal body responsible for the formulation and direction of India's foreign trade policy programs.
2. The Department of Commerce is mandated to manage financing programs for the export-import sector and handle overseas investments by Indian companies.
3. The Board of Trade is involved in maintaining trade relations and implementing corrective policy measures on behalf of the Government.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The formulation and direction of foreign trade policy is the responsibility of the Department of Commerce, not the EXIM Bank. The EXIM Bank's role is in financing. Statement 2 is incorrect. Managing financing programs for the export-import sector and handling overseas investments is the mandate of the EXIM Bank, not the Department of Commerce. The statement swaps the functions of the two institutions. Statement 3 is correct. The Board of Trade's function includes maintaining trade relations and taking corrective actions related to government policy measures.

Question 16

Consider the following statements regarding export promotion initiatives in India:
1. The Krishi UDAN Scheme, focusing on transporting perishable food products, was launched by the Ministry of Commerce and Industry.
2. The 'Ubharte Sitare Fund', an Alternative Investment Fund for export-oriented MSMEs, was jointly set up by the EXIM Bank and SIDBI.
3. The National Export Insurance Account (NEIA) scheme was established to provide credit risk cover for high-value, long-term exports that are commercially viable.

How many of the above statements are correct?

Accepted Answer

Only two. To determine the correct option, let's analyze each statement:

1.  **Statement 1 is incorrect.** The Krishi UDAN Scheme was launched by the Ministry of Civil Aviation to assist farmers in transporting agricultural products on international and national routes, thereby improving value realization for their produce.

2.  **Statement 2 is correct.** The 'Ubharte Sitare Fund' is an Alternative Investment Fund established as a joint initiative by the Export-Import Bank of India (EXIM Bank) and the Small Industries Development Bank of India (SIDBI) to support export-oriented MSMEs.

3.  **Statement 3 is correct.** The National Export Insurance Account (NEIA) provides credit risk coverage for medium and long-term, high-value export projects. It specifically covers projects that are commercially viable but may be beyond the underwriting capacity of the Export Credit Guarantee Corporation (ECGC).

Since statements 2 and 3 are correct, a total of two statements are correct. Therefore, option (b) is the correct answer.

Question 17

Consider the following statements:
Statement-I: The Remission of Duties and Taxes on Exported Products (RoDTEP) scheme is designed to enhance the competitiveness of Indian exports in global markets.
Statement-II: The RoDTEP scheme operates by allowing the duty-free import of capital goods required for manufacturing export products.

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

Accepted Answer

Statement-I is correct but Statement-II is incorrect. Statement-I is correct. The RoDTEP scheme is based on the globally accepted principle that taxes and duties should not be exported. By remitting or exempting such domestic levies on exported products, it reduces their final cost and thus enhances their competitiveness in international markets. Statement-II is incorrect. The mechanism described, which is the duty-free import of capital goods for producing export items, is a feature of the Export Promotion Capital Goods (EPCG) Scheme, not the RoDTEP scheme. The RoDTEP scheme focuses on remitting taxes and levies already charged on the final exported products, not on facilitating duty-free imports of machinery.

Question 18

With reference to the composition of India's merchandise foreign trade, consider the following statements:
1. For the period 2023-24 (Apr-Jan), China was India's largest import source, followed by the UAE.
2. For the period April 2024—December 2024, Petroleum: Crude and Gold were the top two items in India's import basket, respectively.
3. For the period April 2024—December 2024, Petroleum Products were the largest component of India's merchandise exports by value.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. According to the provided data for 2023-24 (Apr-Jan), the ranking of India's import sources was China > Russia > UAE. Therefore, Russia was the second-largest source, not the UAE. Statement 2 is correct. The data for April 2024—December 2024 clearly ranks the top import items as 'Petroleum: Crude' followed by 'Gold'. Statement 3 is incorrect. The data for April 2024—December 2024 shows that 'Engineering Goods' constituted the largest share of merchandise exports, followed by 'Petroleum Products'. Therefore, Petroleum Products were the second-largest component, not the largest.

Question 19

Consider the following pairs regarding stages of economic integration and their key features:
1. Customs Union : Adoption of a common external trade policy towards non-members.
2. Common Market : Free movement of factors of production, such as capital and labour.
3. Economic Union : Adoption of a common currency and monetary policy.

Which of the pairs given above is/are correctly matched?

Accepted Answer

1 and 2 only. Pair 1 is correctly matched. A Customs Union builds on a Free Trade Area by requiring member countries to establish a common external trade policy, such as a common external tariff, towards non-member countries. Pair 2 is correctly matched. A Common Market represents a more advanced stage than a Customs Union and is distinctly characterized by allowing the free movement of factors of production, namely capital and labour, among its member nations. Pair 3 is incorrectly matched. An Economic Union involves the harmonization of national economic policies. The adoption of a common currency and a unified monetary policy is the defining feature of a Monetary Union, which is a more advanced stage of integration.

Question 20

Consider the following statements:
Statement-I: A Comprehensive Economic Cooperation Agreement (CECA) is more comprehensive and broader in scope than a Comprehensive Economic Partnership Agreement (CEPA).
Statement-II: CEPA covers trade in services and investments, whereas CECA involves only tariff reduction or elimination on listed items.

Accepted Answer

Statement-I is incorrect but Statement-II is correct. Statement-I is incorrect. A Comprehensive Economic Partnership Agreement (CEPA) is broader than a Comprehensive Economic Cooperation Agreement (CECA). Statement-II is correct. The primary difference is that CECA focuses on tariff reduction/elimination for goods, while CEPA's scope is wider, covering trade in services and investments in addition to goods. Therefore, Statement-II correctly explains why CEPA is broader than CECA, but it contradicts the claim made in Statement-I.

Question 21

With reference to the Regional Comprehensive Economic Partnership (RCEP), consider the following statements:
1. The agreement's scope includes provisions for Intellectual Property Rights, environmental protection, and labour rights.
2. India's primary reason for not joining the partnership was its concern over the trade deficit with China.
3. RCEP is recognized as the world's largest free trade zone primarily due to the vast geographical area it covers.

Accepted Answer

None. Statement 1 is incorrect. The RCEP agreement covers Intellectual Property Rights (IPRs) but explicitly does not cover environmental protection and labour rights. Statement 2 is incorrect. While concern over the trade deficit with China was a significant factor, it was not the sole reason. The failure of the agreement to adequately liberalise the services sector was also a key concern for India. The use of the word 'primary' makes the statement exclusionary and thus incorrect. Statement 3 is incorrect. RCEP is the world's largest free trade zone in terms of trade volume, not geographical area.

Question 22

With reference to India's integration into Global Value Chains (GVCs), consider the following statements:
1. A strategy focused on assembling imported components for final export is an example of increasing forward participation in GVCs.
2. The Production Linked Incentive (PLI) scheme primarily encourages backward participation in GVCs.
3. Improving 'Trade Across Borders' parameters is crucial for enhancing a country's GVC integration.
How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is incorrect. Assembling imported components for final export is a classic example of 'backward participation' in GVCs, where a country uses inputs from other countries in its exports. 'Forward participation' involves exporting domestically produced intermediate goods that are then used in another country's exports. Statement 2 is correct. The PLI scheme incentivizes domestic manufacturing, including the assembly of final goods, which is a form of backward participation. Statement 3 is correct. Efficient customs, port infrastructure, and logistics (all components of 'Trade Across Borders') reduce costs and turnaround times, making a country a more reliable and attractive location for time-sensitive GVC operations.

Question 23

With reference to India's recent export promotion strategy, consider the following statements:
Statement-I: The policy focus is shifting towards non-price factors like quality and infrastructure over relying on currency depreciation.
Statement-II: A sustained currency depreciation consistently leads to a long-term, structural increase in a country's export competitiveness.

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. Recent policy discourse emphasizes building durable competitiveness through structural reforms (logistics, quality) rather than short-term gains from currency movements. Statement-II is incorrect. This is a directional inversion. While depreciation can offer a temporary price advantage, it is not a sustainable long-term strategy. It can increase the cost of imported inputs, fuel inflation, and deter long-term investment, thereby potentially harming structural competitiveness.

Question 24

With reference to the new Export Promotion Mission (2026-02-26), consider the following statements:
1. The mission is primarily implemented by the Directorate General of Foreign Trade (DGFT).
2. It aims to diversify the export basket beyond traditional goods and services.
3. The Reserve Bank of India is a designated nodal agency for its implementation.
Select the correct answer using the code given below:

Accepted Answer

1 and 2 only. Statement 1 is correct. The DGFT, under the Ministry of Commerce and Industry, is the primary agency for implementing foreign trade policy and related missions. Statement 2 is correct. A key objective of modern export missions is to move up the value chain and diversify into new products and markets. Statement 3 is incorrect. The RBI's role is regulatory, concerning foreign exchange management (FEMA) and monetary policy. It is not an implementing or nodal agency for a trade promotion mission, which falls under the executive domain of the Commerce Ministry.

Foreign Exchange and Trade Policy

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