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Foreign Exchange, FDI & External Debt (Part – II)

📆 October 22, 2024

Total Questions: 50

31. Which among the following institutions regulates the external commercial borrowings? [U.P.P.C.S. (Mains) 2010]

Correct Answer: (d) Reserve Bank of India
Solution:External commercial borrowings (ECBs) are commercial loans raised by eligible entities from recognized non-resident entities. The Reserve Bank of India regulates ECBs by specifying parameters, such as eligible borrowers and lenders, permitted end use, minimum average maturity period, maximum all-in-cost ceiling, etc.

About External Commercial Borrowings (ECBs):

  • ECBs refer to the borrowing of funds by Indian companies from foreign sources in the form of loans, bonds, or other financial instruments.
  • Purpose: It can be used to finance a variety of purposes, including the expansion of business, the acquisition of assets, and the repayment of existing debt.
  • Source of ECBs: ECBs can be obtained from a variety of sources, including foreign banks, international financial institutions, and foreign subsidiaries of Indian companies.
  • ECB can be in the form of rupee-denominated loans, which are repaid in Indian rupees, or foreign currency-denominated loans, which are repaid in a foreign currency.

32. According to the World Bank's Global Development Finance Report 2010, the correct descending order of the world's five most indebted countries is: [U.P.P.C.S. (Pre) 2011*]

Correct Answer: (b) Russia, China, Turkey, Brazil, India
Solution:
  • As per the question period, option (b) was the correct answer.
    At end-March 2024, India's external debt was US$ 663.8 billion, an increase of US$ 39.7billionover its level at end-March 2023.
  • The external debt-to-GDP ratio declined to 18.7 percent end-March 2024 from 19.0 percent at end-March 2023.
  • The Valuation effect due to the appreciation of the US dollar vis-à-vis the Indian rupee and other major currencies such as the yen, euro, and SDR amounted to US$ 8.7 billion.
  • Valuation effects are the change in value of assets held abroad with regard to the value of domestic assets held by foreign investors.
  • Excluding the valuation effect, external debt would have increased by US$ 48.4 billion instead of US$ 39.7 billion at end-March 2024 over end-March 2023.
  • At end-March 2024, long-term debt (with an original maturity of above one year) was placed at US$ 541.2 billion, recording an increase of US$ 45.6 billion over its level at end-March 2023.
  • The share of short-term debt (with an original maturity of up to one year) in total external debt declined to 18.5 percent at end-March 2024 from 20.6 per cent at end-March 2023.

33. As on today, which one of the following countries has the largest external debt? [I.A.S. (Pre) 1993]

Correct Answer: (c) USA
Solution:As per "India's External Debt: A Status Report 2022-23', USA is the most heavily indebted country in the world with gross external debt stock estimated at US $ 24.5 trillion, constituting 26.3 percent of the total global debt at end-December, 2022. Following the USA are the UK (9.5 percent), France (7.4 percent), Germany (6.9 percent) and Japan (4.6 percent). China is at 11th position globally in terms of external debt stock.

34. On the basis of size and composition of external debt, World Bank has classified India as : [U.P.P.C.S. (Mains) 2009]

Correct Answer: (b) a less indebted country
Solution:World Bank has classified India as less indebted country on the basis of size of external debt and its components and debt to GDP ratio. As per the Ministry of Finance, Government of India, India's external debt continues to be sustain able and prudently managed. As at end-December 2023 (P), India's external debt as a ratio to GDP fell marginally to 18.7 percent from 18.8 percent as at end-September 2023 (PR). Forex reserves to external debt ratio, is increased to 96 per- cent from 92.2 percent during the same period, thereby consolidating India's position as a net creditor to the world.

35. Which country has highest loan from the World Bank after India till June, 2010? [R.A.S./R.T.S.(Pre) 2010]

Correct Answer: (c) Mexico
Solution:As per the question period, option (c) was the correct answer. According to World Bank's data, 5 countries having highest debt stock of IBRD loans and IDA credits (DOD, current US $) in 2022 are as follows: 1. India (US $ 38.26 billion), 2. Indonesia (US $ 20.63 billion), 3. Bangladesh (US $18.23 billion), 4. Pakistan (US $ 18.07 billion), 5. China (US $16.07 billion).

36. In the year 2001, India offered a grant of five million dollars to Tajikistan to: [I.A.S. (Pre) 2002]

Correct Answer: (a) tackle the drought situation
Solution:In May 2001, India offered a grant of US $ 5 million to Tajikistan to tackle the drought situation.

Indian and Tajikistan have cooperated closely in various multilateral fora. In 2020, Tajikistan extended support for India's candidature for a nonpermanent seat in UNSC for the term 2021-22. Tajikistan has publicly supported India's bid for UNSC permanent membership including in the joint statement issued on 8th October 2018 during the state visit of President Shri Ram Nath Kovind. Tajikistan strongly supported SCO Member status for India. India supported Tajikistan's accession to WTO in March 2013. India has consistently supported Tajikistan's proposals at UN on water related issues. India also supported Tajikistan's candidature to ECOSOC.

37. In the year 2001, Germany approved a $ 32 million credit to India: [I.A.S. (Pre) 2002]

Correct Answer: (b) for Tehri dam project
Solution:In October 2001, Germany granted US $ 32 million credit for Uttarakhand based Tehri dam project.

Germany is India's largest trading partner within the European Union (EU), with bilateral trade reaching US$26 billion in 2022-23.
Indian exports to Germany rose to US$10.1 billion, while German imports to India stood at around US$14.9 billion. While Germany and India lack a direct free trade agreement (FTA), Germany is an advocate for the ongoing EU-India FTA negotiations, which aim to enhance economic ties further.

38. Which of the following statement about green bonds is NOT true? [U.P.R.O./A.R.O. (Re-Exam) (Pre) 2016]

Correct Answer: (d) Green bonds are fixed interest loan with short date maturities
Solution:A green bond is a fixed-income instrument designed specially to support specific climate-related or environmental projects. Green bonds typically come with tax incentives to enhance their attractiveness to investors. They are low cost loans with generally long-term maturities. Green bonds are financial market innovation and relatively new asset class, but they are growing rapidly. Green bonds were first introduced by European Investment Bank (EIB) in 2007 as 'Climate Awareness Bond' to fund renewable energy and energy efficiency projects. Afterwards the World Bank issued a labelled 'Green Bond' in 2008.

39. Consider the following statements for 'India Millennium Deposit's Scheme: [U.P.P.C.S. (Mains) 2005]

1. The scheme was launched by the State Bank of India.

2. It was intended for Resident Indians only.

3. The maturity period of the scheme was six years only.

Which of the Statements given above is/are correct?

Correct Answer: (d) 1 only
Solution:On 21 October, 2000, 'Indian Millennium Deposit' (IMD) Scheme was launched by the State Bank of India. It offered an 8.5 percent return to depositors and raised $ 5.5 billion. Under that scheme, for five years foreign currency deposits, denominated in US dollar, pound sterling and euro were accepted. The objective of the scheme was to attract foreign exchange through Non-Resident Indians (NRIs).

40. Resurgent India Bonds were issued in US dollar, Pound Sterling and: [I.A.S. (Pre) 2000]

Correct Answer: (b) Deutsche Mark
Solution:On 5th August, 1998, the State Bank of India issued the 'Resurgent India Bond' in three different currencies-US dollar, Pound Sterling and Deutsche Mark for a period of five years.

RIBs were designed to attract foreign currency investments from NRIs and OCBs to support India's economic development, particularly in infrastructure.
Key Features:

  • Tenure: The bonds typically had a 5-year tenure.
  • Interest Rates: Interest rates varied depending on the currency, with rates like 7.75% for US dollars, 8.00% for Pound Sterling, and 6.25% for Deutsche Mark.
  • Repatriation: Principal and interest were fully repatriable in foreign currency to non-resident holders.
  • Tax Benefits: Interest earned on RIBs was exempt from Indian income tax.
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