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

Total Questions: 50

41. Which of the following is a bond through which Indian entities can raise money from foreign markets in rupees, and not in foreign currency? [B.P.S.C. (Pre) 2016]

Correct Answer: (b) Masala Bonds
Solution:Masala Bonds are bonds through which Indian entities can raise money from foreign markets in rupees, and not in foreign currency. Masala Bonds are rupee-denominated borrowings issued by Indian entities in overseas market. The objective of Masala Bonds is to fund infrastructure projects in India, fuel internal growth via borrowing and internationalize the Indian currency. The issuer of these bonds is shielded against the risk of currency fluctuations, typically associated with borrowing in Indian currency.

42. With reference to 'IFC Masala Bonds' sometimes seen in the news, which of the statements given below is/are correct? [I.A.S. (Pre) 2016]

1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank.

2. They are the rupee-denominated bonds and a source of debt financing for the public and private sector.

Select the correct answer using the code given below:

Correct Answer: (c) Both 1 and 2
Solution:Masala bonds are bonds issued outside India but denominated in Indian rupees, rather than local currency. The main difference associated with the masala bond is that it makes the investor to bear the currency risk not the borrower as opposite to the dollar bonds.

The first Masala bond was issued in November, 2014 by the World Bank-backed IFC (International Finance Corporation) to fund infrastructure projects in India. On 29 September, 2015, RBI allowed Indian corporates to raise money through the issuance of rupee bonds (also called Masala bonds) outside India. It falls within the External Commercial Borrowings (ECB).

43. Closure of Oil-Pool account effected from: [U.P.P.S.C. (GIC) 2010]

Correct Answer: (b) 1-4-2002
Solution:Administered price mechanism (APM) in oil sector in India was abolished on 1.4.2002 during the finance ministership of Yashwant Sinha. Consequently Oil-Pool-Account was abolished.

Even though APM was dismantled effective 1.4.2002, since 2004, the consumers of sensitive petroleum products viz. Petrol (decontrolled w.e.f. 26.06.2010), Diesel (decontrolled w.e.f. 19.10.2014), PDS Kerosene and Domestic LPG were being insulated from the impact of unprecedented P.S.C. (Pre) 2016 high international oil prices by the Public Sector Oil Marketing Companies (OMCs) namely IOCL, HPCL & BPCL

44. Which of the following best describes the term 'Import cover', sometimes seen in the news? [I.A.S. (Pre) 2016]

Correct Answer: (d) It is the number of months of imports that could be paid for by a country's international reserves
Solution:Import cover describes the number of months of imports that could be paid for by a country's international reserves. At end of December, 2023, foreign exchange reserve cover of imports (on balance of Payments basis) increased to 11 months from 10.4 months at end - September 2023.

The importance of building up and being able to sustain a higher import cover had been recognized by India's policy makers even prior to the 1991 crisis. India had foreign exchange reserves which meant to cover import costs for two years.

But, that was just sufficient to cover close to two and half months of imports only, because of crisis. India's Foreign exchange reserve went up from $ 2.2 billion in 1990-1991 to $20.8 billion in 1994-95. During the currency crisis of 2013, when foreign exchange reserves fell to about $275 billion, import cover declined to about seven months.

45. In the fiscal year 2018-19, the total foreign exchange reserves are: [B.P.S.C. (Pre) 2019]

Correct Answer: (d) Rs. 28,55,882 crore
Solution:In the fiscal year 2018-19 (end-March, 2019), the total foreign exchange reserves of India was at Rs. 28,55,882 crore. In the fiscal year 2023-24 (as on 29 March, 2024), it is increased to Rs. 53,84,281 crore (US $ 645.58 billion).

India's foreign exchange reserves comprise of;

  • Foreign currency assets (FCAs): These are maintained in currencies like the US dollar, euro, pound sterling,
    Australian dollar and Japanese yen.
  • Gold
  • SDR (Special Drawing Rights): This is the reserve currency with IMF.
  • RTP (Reserve Tranche Position): This is the reserve capital with IMF.

The biggest contributor to India's Forex reserves is foreign currency assets, followed by gold.
Purpose:

  • They are used to back liabilities on their own issued currency, support the exchange rate and set monetary policy.
  • To ensure that RBI has backup funds if their national currency rapidly devalues or becomes altogether insolvent.
  • If the value of the Rupee decreases due to an increase in the demand of the foreign currency, then RBI sells the dollar in the Indian money market so that depreciation of the Indian currency can be checked.
  • A country with a good stock of forex has a good image at the international level because the trading countries can be sure about their payments.
  • A good forex reserve helps in attracting foreign trade and earns a good reputation with trading partners.

46. According to the Reserve Bank of India, what was the total values of the foreign exchange reserves of India in 2018-19? [B.P.S.C. (Pre) (Re-Exam) 2020]

Correct Answer: (d) 412871 million US dollar
Solution:According to the Reserve Bank of India, the total values of the foreign exchange reserves of India in 2018-19 (in end- March 2019) was at US $ 412871 million. As on 29 March, 2024, India's foreign exchange reserves stood at US $ 645.58 billion.

India's foreign exchange reserves comprise of;

  • Foreign currency assets (FCAs): These are maintained in currencies like the US dollar, euro, pound sterling,
    Australian dollar and Japanese yen.
  • Gold
  • SDR (Special Drawing Rights): This is the reserve currency with IMF.
  • RTP (Reserve Tranche Position): This is the reserve capital with IMF.

The biggest contributor to India's Forex reserves is foreign currency assets, followed by gold.
Purpose:

  • They are used to back liabilities on their own issued currency, support the exchange rate and set monetary policy.
  • To ensure that RBI has backup funds if their national currency rapidly devalues or becomes altogether insolvent.
  • If the value of the Rupee decreases due to an increase in the demand of the foreign currency, then RBI sells the dollar in the Indian money market so that depreciation of the Indian currency can be checked.
  • A country with a good stock of forex has a good image at the international level because the trading countries can be sure about their payments.
  • A good forex reserve helps in attracting foreign trade and earns a good reputation with trading partners.

47. Which of the following statements is not true in the context of foreign exchange reserves of India? [U.P.U.D.A./L.D.A. (Pre) 2001]

Correct Answer: (c) Special Drawing Rights are not included in this
Solution:India's foreign exchange reserves comprise foreign currency assets (FCAs), gold reserves, special drawing rights (SDRs) and the country's reserve tranche position (RTP) with the International Monetary Fund (IMF). It is maintained by the Reserve Bank of India for the Indian Government. So all given statements are true except statement of option (c).

48. Which among the following has largest share in the foreign exchange reserves of India? [U.P.P.C.S. (Mains) 2002*]

Correct Answer: (c) Foreign currency assets
Solution:Foreign currency assets (FCAs) has largest share in the foreign exchange reserves of India. As on 29 March, 2024, the value of components of India's foreign exchange reserves is as follows:

                  Foreign Exchange Reserves of India

Item Value (As on 29 March, 2024) Rs. CroreUS $ million
Foreign Currency Assets4759071570618
Gold43502452160
SDRs15133518145
Reserve Position in the IMF388514660
Total Reserves5384281645583

49. Which one of the following groups of items is included in India's foreign exchange reserves? [I.A.5. (Pre) 2013]

Correct Answer: (b) Foreign currency assets, gold holdings of the RBI and SDRS
Solution:India's foreign exchange reserves consist of the foreign currency assets, gold, SDRs and the reserve tranche position in the International Monetary Fund. It does not consist of the loans from World Bank or from foreign countries.

India's foreign exchange reserves comprise of;

  • Foreign currency assets (FCAs): These are maintained in currencies like the US dollar, euro, pound sterling,
    Australian dollar and Japanese yen.
  • Gold
  • SDR (Special Drawing Rights): This is the reserve currency with IMF.
  • RTP (Reserve Tranche Position): This is the reserve capital with IMF.

The biggest contributor to India's Forex reserves is foreign currency assets, followed by gold.
Purpose:

  • They are used to back liabilities on their own issued currency, support the exchange rate and set monetary policy.
  • To ensure that RBI has backup funds if their national currency rapidly devalues or becomes altogether insolvent.
  • If the value of the Rupee decreases due to an increase in the demand of the foreign currency, then RBI sells the dollar in the Indian money market so that depreciation of the Indian currency can be checked.
  • A country with a good stock of forex has a good image at the international level because the trading countries can be sure about their payments.
  • A good forex reserve helps in attracting foreign trade and earns a good reputation with trading partners.

50. The Foreign Exchange Reserves (FER) of RBI include which of the following? [B.P.S.C. (Pre) 2023]

1. Foreign Currency Assets (FCA)

2. Gold

3. Special Drawing Rights (SDR)

4. Reserve Tranche Position

Select the correct answer using the codes given below.

Correct Answer: (d) All of the above
Solution:India's foreign exchange reserves consist of the foreign currency assets, gold, SDRs and the reserve tranche position in the International Monetary Fund. It does not consist of the loans from World Bank or from foreign countries.

India's foreign exchange reserves comprise of;

  • Foreign currency assets (FCAs): These are maintained in currencies like the US dollar, euro, pound sterling,
    Australian dollar and Japanese yen.
  • Gold
  • SDR (Special Drawing Rights): This is the reserve currency with IMF.
  • RTP (Reserve Tranche Position): This is the reserve capital with IMF.

The biggest contributor to India's Forex reserves is foreign currency assets, followed by gold.
Purpose:

  • They are used to back liabilities on their own issued currency, support the exchange rate and set monetary policy.
  • To ensure that RBI has backup funds if their national currency rapidly devalues or becomes altogether insolvent.
  • If the value of the Rupee decreases due to an increase in the demand of the foreign currency, then RBI sells the dollar in the Indian money market so that depreciation of the Indian currency can be checked.
  • A country with a good stock of forex has a good image at the international level because the trading countries can be sure about their payments.
  • A good forex reserve helps in attracting foreign trade and earns a good reputation with trading partners.