External Sector of Economy Archives

51. Which one of the following groups of items is included in India’s fore

Which one of the following groups of items is included in India’s foreign-exchange reserves?

[amp_mcq option1=”Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries” option2=”Foreign-currency assets, gold holdings of the RBI and SDRs” option3=”Foreign-currency assets, loans from the World Bank and SDRs” option4=”Foreign-currency assets, gold holdings of the RBI and loans the World Bank” correct=”option2″]

This question was previously asked in

UPSC IAS – 2013

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India’s foreign-exchange reserves, maintained by the RBI, include Foreign-currency assets (FCAs), Gold holdings of the RBI, and Special Drawing Rights (SDRs).

Foreign exchange reserves are assets held by a central bank in foreign currencies, used to back liabilities and influence monetary policy. The major components of India’s foreign exchange reserves are FCAs (investments in foreign government securities, deposits in foreign central banks/BIS), Gold, SDRs (an international reserve asset created by the IMF), and the Reserve Position in the IMF (India’s share in the IMF quota).

Loans from foreign countries or from the World Bank are typically part of external debt, which is a liability, not an asset component of foreign exchange reserves. Maintaining adequate foreign exchange reserves helps in managing exchange rate volatility, meeting external debt obligations, and providing confidence to international investors.

52. Which of the following constitute Capital Account? 1. Foreign Loans

Which of the following constitute Capital Account?

1. Foreign Loans
2. Foreign Direct Investment
3. Private Remittances
4. Portfolio Investment

Select the correct answer using the codes given below.

[amp_mcq option1=”1, 2 and 3″ option2=”1, 2 and 4″ option3=”2, 3 and 4″ option4=”1, 3 and 4″ correct=”option2″]

This question was previously asked in

UPSC IAS – 2013

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The Capital Account of the Balance of Payments records transactions involving changes in ownership of foreign financial and non-financial assets. Foreign Loans (both inflow and outflow), Foreign Direct Investment (FDI), and Portfolio Investment (like buying stocks or bonds) are all classified under the Capital Account as they represent changes in assets or liabilities. Private Remittances, which are unilateral transfers of money, are part of the Current Account.

The Balance of Payments (BoP) summarizes all economic transactions between residents of a country and the rest of the world over a period. It consists of the Current Account and the Capital Account. The Capital Account deals with cross-border investment flows and changes in assets/liabilities.

The Current Account records transactions related to trade in goods and services, income receipts and payments, and current transfers (like remittances, grants). The Capital Account, broadly defined, includes capital transfers (like debt forgiveness, grants) and investment flows (FDI, portfolio investment, other investments like loans and deposits). In India’s BoP presentation, the Capital Account is mainly composed of Investment (FDI, Portfolio, Other) and Loans, and Banking Capital.

53. The balance of payments of a country is a systematic record of

The balance of payments of a country is a systematic record of

[amp_mcq option1=”all import and export transactions of a country during a given period of time, normally a year” option2=”goods exported from a country during a year” option3=”economic transaction between the government of one country to another” option4=”capital movements from one country to another” correct=”option1″]

This question was previously asked in

UPSC IAS – 2013

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The balance of payments (BoP) of a country is a systematic record of all economic transactions between the residents of a country and the rest of the world during a specific period, typically a year.

BoP includes transactions related to trade in goods and services (Current Account), income flows, and capital flows (Capital and Financial Account). Option A, while slightly simplified by focusing only on “import and export transactions,” is the most comprehensive description among the choices, as these trade transactions are a major part of the Current Account. The other options are too narrow (only goods, only government, or only capital).

The BoP is divided into two main accounts: the Current Account and the Capital Account (often presented as Capital and Financial Account). The Current Account records trade in goods and services, income (interest, dividends), and current transfers. The Capital Account records capital transfers and the acquisition/disposal of non-produced non-financial assets. The Financial Account records transactions involving financial assets and liabilities. The BoP should ideally balance over time (Credits = Debits).

54. Which of the following is NOT one of the pillars of India’s ‘Foreign T

Which of the following is NOT one of the pillars of India’s ‘Foreign Trade Policy-2023’ ?

[amp_mcq option1=”Enlarging MFN (Most Favored Nations)” option2=”Export promotion through collabo- ration” option3=”Ease of doing business” option4=”Emerging areas – streamlining SCOMET policy” correct=”option1″]

This question was previously asked in

UPSC CAPF – 2024

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‘Enlarging MFN (Most Favored Nations)’ is not listed as one of the explicitly stated pillars of India’s Foreign Trade Policy 2023. The policy outlines specific strategies and focus areas, none of which is termed “Enlarging MFN”.

The Foreign Trade Policy 2023 is structured around four pillars: (i) Incentive to Remission, (ii) Export Promotion through Collaboration – Exporters, States, Districts, Indian Missions, (iii) Ease of doing business – reduction in transaction cost and time, and (iv) Emerging Areas – E-commerce exports and streamlining SCOMET policy.

MFN is a status accorded by one country to another in international trade, meaning that the granting country must extend to the recipient country any trade advantages (such as low tariffs) that it extends to any other country. While India adheres to WTO principles including MFN, it is not framed as a strategic pillar for promoting exports in the domestic trade policy document.

55. Which of the following statements with regard to the outcomes of the t

Which of the following statements with regard to the outcomes of the talks between the Prime Minister of India and the President of UAE held in February, 2024 is/are correct ?

1. Both countries signed an agreement on inter-linking of domestic debit/credit cards
2. An MoU was signed on cooperation in digital infrastructure projects
3. Both countries agreed that a Bilateral Investment Treaty shall be signed in the next meeting at the ministerial level

Select the answer using the code given below :

[amp_mcq option1=”1 and 2 only” option2=”2 only” option3=”1 and 3 only” option4=”1, 2 and 3″ correct=”option1″]

This question was previously asked in

UPSC CAPF – 2024

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Statement 1 and Statement 2 are correct, while Statement 3 is incorrect. The agreement on inter-linking of domestic debit/credit cards (Rupay and Jaywan) was signed. An MoU was signed on cooperation in digital infrastructure projects. However, the Bilateral Investment Treaty (BIT) was signed during this visit, not agreed to be signed in a future meeting.

The outcomes of the visit included significant agreements in the financial sector (linking payment systems) and digital infrastructure. The Bilateral Investment Treaty was a key deliverable of this specific visit.

The visit of the Prime Minister of India to the UAE in February 2024 saw several key agreements aimed at deepening economic and technological ties. The inter-linking of Rupay and Jaywan cards facilitates seamless cross-border transactions. The BIT is expected to boost bilateral investment flows by providing greater protection and certainty to investors.

56. Adequacy of foreign exchange reserves of a country is captured by whic

Adequacy of foreign exchange reserves of a country is captured by which of the following indicators?

Reserves to import ratio
Reserves to external debt ratio
Reserves to GDP ratio
Reserves to monetary aggregates

Select the correct answer using the code below:

[amp_mcq option1=”1 and 3 only” option2=”1, 2, 3 and 4″ option3=”2, 3 and 4 only” option4=”1, 2 and 4 only” correct=”option2″]

This question was previously asked in

UPSC CAPF – 2023

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Assessing the adequacy of a country’s foreign exchange reserves involves looking at multiple indicators because reserves serve various purposes (financing imports, managing external debt, dealing with capital outflows, maintaining exchange rate stability).
1. Reserves to import ratio: Measures the capacity to cover future import bills.
2. Reserves to external debt ratio: Indicates the ability to meet external debt obligations, particularly short-term debt.
3. Reserves to GDP ratio: Provides context on the size of reserves relative to the overall economy.
4. Reserves to monetary aggregates (like M2): Assesses vulnerability to potential capital flight if domestic money supply seeks to convert to foreign currency.
All these ratios provide valuable insights into different aspects of reserve adequacy and external vulnerability.

Adequacy of foreign exchange reserves is a multifaceted concept, evaluated using various ratios that relate reserves to potential drains such as imports, external debt, and domestic money supply.

While specific target levels for each ratio may vary depending on the country’s economic structure, exchange rate regime, and integration into global financial markets, all four listed indicators are commonly used by international bodies (like the IMF) and analysts to assess the strength and adequacy of a country’s reserve position.

57. An Indian businessperson buys shares in a British car company. This tr

An Indian businessperson buys shares in a British car company. This transaction will be reflected in :

[amp_mcq option1=”Balance of Trade, but not in Balance of Payments.” option2=”Balance of Payments, but not in Balance of Trade.” option3=”both Balance of Payments and Balance of Trade.” option4=”neither Balance of Payments nor Balance of Trade.” correct=”option2″]

This question was previously asked in

UPSC CAPF – 2023

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The Balance of Payments (BOP) is a record of all economic transactions between residents of a country and the rest of the world over a specific period. It comprises the Current Account (trade in goods and services, income, transfers) and the Capital/Financial Account (investments, loans, reserves). The Balance of Trade (BOT) is typically a sub-part of the Current Account, recording only the exports and imports of *goods*. Buying shares in a foreign company is a financial transaction, specifically a portfolio investment abroad, which is recorded in the Capital/Financial Account of the BOP. It does not involve the trade of goods. Therefore, the transaction will be reflected in the Balance of Payments but not in the Balance of Trade.

– Balance of Payments (BOP) records all international economic transactions, including financial ones.
– Balance of Trade (BOT) primarily records international trade in goods.
– Buying foreign shares is a financial investment, recorded in the Capital/Financial Account of the BOP.

The BOP must always balance in accounting terms, meaning the sum of the Current Account, Capital Account, and Financial Account, plus net errors and omissions, is zero. A transaction like buying foreign shares represents an outflow of capital from the investor’s country and is recorded as a debit item in the Financial Account.

58. Recently, with which one of the following countries did India sign the

Recently, with which one of the following countries did India sign the ‘Comprehensive Economic Partnership Agreement’?

[amp_mcq option1=”Egypt” option2=”Israel” option3=”South Africa” option4=”United Arab Emirates” correct=”option4″]

This question was previously asked in

UPSC CAPF – 2022

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India and the United Arab Emirates (UAE) signed the Comprehensive Economic Partnership Agreement (CEPA) on 18th February 2022, which came into force on 1st May 2022.

Comprehensive Economic Partnership Agreements (CEPAs) are broader than Free Trade Agreements (FTAs) and cover trade in goods, services, investment, and other areas of economic partnership. India has been actively pursuing such agreements to boost its trade and economic ties globally.

The India-UAE CEPA aims to boost bilateral trade in goods to $100 billion and trade in services to $15 billion within five years. It provides preferential access to each other’s markets, reduces tariffs, and facilitates easier trade and investment flows.

59. As per the latest trade agreement in Bali of WTO, India and other deve

As per the latest trade agreement in Bali of WTO, India and other developing and under developed countries can launch food security programmes :

[amp_mcq option1=”forever without any penalty under WTO rules” option2=”till an alternative mechanism is developed” option3=”for four calendar years” option4=”only if subsidy component under such programmes is less than 10 per cent” correct=”option2″]

This question was previously asked in

UPSC CAPF – 2014

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At the WTO Ministerial Conference in Bali in December 2013, an agreement was reached on public stockholding programs for food security. Developing countries like India faced challenges with exceeding the permitted levels of trade-distorting subsidies under existing WTO rules when procuring food grains at minimum support prices (MSPs) for public distribution. The Bali agreement included a “peace clause” which allowed developing countries to continue these programs without being challenged legally under WTO rules, even if they exceeded the agreed subsidy limits, *until a permanent solution is found and adopted*. This “until” clause is captured by option B.

– WTO Agreement: Bali Ministerial Conference, 2013.
– Issue: Public stockholding programs for food security in developing countries.
– Outcome: ‘Peace Clause’ allowing continuation of programs despite potential breaches of subsidy limits.
– Duration: Temporary initially, until a permanent solution is agreed upon (later made indefinite).

The peace clause required countries to notify the WTO about their stockholding programs and provide data on procurement, subsidies, and distribution. The search for a permanent solution to this issue continued after Bali. At the Nairobi Ministerial Conference in 2015, the peace clause was extended indefinitely, meaning countries can continue using the peace clause protection until a permanent solution is found. Option B accurately reflects the condition under which the programs were allowed to continue based on the Bali agreement and the subsequent understanding.

60. The Government of India on 12th June, 2013 enhanced the limit of forei

The Government of India on 12th June, 2013 enhanced the limit of foreign investments in government securities by 5 billion US dollar. In this regard, which of the following statements is not correct?

[amp_mcq option1=”It was done in order to increase inflow of overseas capital” option2=”It will strengthen the value of rupee” option3=”The foreign institutional investors registered to SEBI are only eligible for investment in the enhanced limit of 5 billion US dollar” option4=”The investment can be made in all categories of investments across the board” correct=”option4″]

This question was previously asked in

UPSC CAPF – 2013

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Statement D is not correct.

– The government enhanced the limit of foreign investments specifically in *government securities* (G-secs) and corporate bonds by $5 billion in June 2013. This measure was aimed at attracting more foreign capital inflow to support the Indian rupee, which was facing depreciation pressure at the time.
– Increasing foreign investment limits in debt markets (like G-secs) helps increase the supply of foreign currency (US Dollars) in the Indian market, which can strengthen the demand for the Indian Rupee, potentially supporting its value.
– Foreign Institutional Investors (FIIs, now largely replaced by Foreign Portfolio Investors – FPIs) registered with SEBI are the primary channels through which foreign investments are made in the Indian securities market under specified limits and regulations. Therefore, eligibility was indeed restricted to such registered entities.
– The enhancement was specifically for investments in government securities and corporate bonds, not “all categories of investments across the board”, which would include equities, alternative investment funds, etc.

– Such measures are part of capital account management by the central bank (RBI) and the government to influence foreign exchange flows and manage the currency value and external debt.
– The total FII limit for investment in government securities was raised to $25 billion after this announcement.