The Tertiary Sector in the Indian Economy

Total Questions: 66

1. Which one of the following is not an instrument of selective credit control in India? [1995]

Correct Answer: (d) Variable cash reserve ratios
Solution:Variable Reserve Ratio (Cash Reserve Ratio) is aimed to control only volume of credit (quantitative method) not both volume and purpose of credit for which bank gives loans.

Qualitative method and selective control method are used for these purposes. It has a number of limitations.

Selective credit controls are intended to encourage or discourage specific types of investment and expenditure by influencing the lending policy of banks and similar credit institutions.

2. Bank Rate implies the rate of interest: [1995]

Correct Answer: (d) at which the Reserve Bank of India discounts the Bills of Exchange.
Solution:Bank Rate is that rate of interest at which central bank of a country provides refinancing facilities to commercial banks.

The bank rate, a benchmark rate at which RBI buys or re-discounts bills of exchange or other commercial papers eligible for purchase.

Every bank needs refinancing as it is very difficult to match borrowings and flow of deposits.

3. Consider the following: [1995]

1. Industrial Finance Corporation of India

2. Industrial Credit and Investment Corporation of India

3. Industrial Development Bank of India

4. Unit Trust of India

The correct sequence in which the above were established is :

Correct Answer: (a) 1, 2, 4, 3
Solution:IFC1-July 1948; ICICI 1955; IDBI July 1964; UTI-1963
The Industrial Finance Corporation of India (IFCI) was the first development finance institution in the country to cater to the long-term finance needs of the industrial sector. Next, the Industrial Credit and Investment Corporation of India (ICICI) was established for the promotion of industrial development by providing finance and credit facilities. The Unit Trust of India (UTI) is India’s first mutual fund, which came into existence in 1964. Lastly, the Industrial Development Bank of India (IDBI) was established in 1964 as a development finance institution for providing credit and other financial facilities.

4. As part of the liberalisation programme and with a view to attract foreign exchange, the government and the RBI have, devised two scheme known as FCNR 'A' and FCNR 'B'. [1995]

Which of the following is/are true regarding these two schemes?

1. Under scheme 'A' RBI bears exchange rate fluctuations.

2. Under scheme 'B' other banks are to meet out the difference in exchange rate fluctuations.

3. Both the schemes stand withdrawn now.

4. Only scheme 'A' has been withdrawn

Codes:

Correct Answer: (d) 1, 2 & 4
Solution:Under the FCNR (A) Scheme, the RBI bore any exchange rate risk, while in the case of FCNR (B) Scheme banks have to bear the exchange rate risk. The FCNR (A) Scheme was replaced by the FCNR (B) Scheme in 1994.

About Foreign Currency Non-Resident (Banks) Deposits

  • It is a deposit scheme that enables the Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs) to invest their foreign earnings in Indian fixed deposit accounts.
  •  The deposit is held in foreign currencies like the US dollar, British pound sterling, Australian dollar, Euro and Canadian dollar.
  • The FCNR deposit can be held as a term deposit, ranging from 1 year to 5 years.
  • The interest rate ceiling for the FCNR deposits is set by the Reserve Bank of India and the individual banks set the interest rate within that ceiling.

Benefits of the FCNR(B) Deposits

  • It helps NRIs to avoid the risk of currency fluctuations as the principal and interest are held in foreign currency, rather than the Indian Rupee.
  • FCNR deposits tend to offer higher interest rates than those offered on regular savings accounts, making them an attractive investment option.
  • The principal and interest are freely repatriable, allowing NRIs to transfer the funds to their residential country.
  • The interest on FCNR deposits is not taxable in India

5. Hawala transactions relate to payments: [1996]

Correct Answer: (a) received in rupees against overseas currencies and vice versa without going through the official channels.
Solution:Hawala is an illegal method of remittance across countries. There are money brokers who are the middle men who undertake hawala transfer. This method of remittance does not involve physical movement of cash. It is also known as Hundi.

The word Hawala means trust. The Hawala system works as it is based on mutual trust between the hawala agents. It works outside the banking system and legal financial systems. The remittance happen based on communication between the hawala agents. It is an alternate to traditional remittance system.

Hawala is used in India, Middle East and South Asia and it is an ancient system of transferring money. Hawala can be defined as a money transfer method, which takes place outside the traditional banking system and requires a minimum of two Hawala dealers (or hawaladars) that take care of the "transaction".

6. The sum of which of the following constitutes Broad Money in India? [1997]

1. Currency with the public

2. Demand deposits with banks

3. Time deposits with banks

4. Other deposits with RBI

Choose the correct answer using the codes given below:

Correct Answer: (c) 1, 2, 3 & 4
Solution:Narrow money is the most liquid part of the money supply because the demand deposits can be withdrawn anytime during the banking hours. Time deposits on the other hand have a fixed maturity period and hence cannot be withdrawn before expiry of this period.

When we add the time despots into the narrow money, we get the broad money, which is denoted by M3. M3 - Narrow money Time Deposits of public with banks.

The Broad money does not include the interbank deposits such as deposits of banks with RBI or other banks. At the same time, time deposits of public with all banks including the cooperative banks are included in the Broad Money.

7. The banks are required to maintain a certain ratio between their cash in hand and total assets. This is called: [1998]

Correct Answer: (b) SLR (Statutory Liquid Ratio)
Solution:SLR or the Statutory Liquidity Ratio is that portion of total deposits which a commercial bank has to maintain with itself at any given point of time in the form of liquid assets like cash in hand, current balances with other banks and first class securities which can be turned into cash (gold, cash or other approve securities). This ratio at present is 25%. Some assets have to be in liquid form to take care of financial emergencies which every bank has to face. It regulates the credit growth in India.

RBI implements the monetary policy's Quantitative and Qualitative instruments to achieve economic goals. The main instruments of these policies are CRR, SLR, Bank Rate, Repo Rate, Reverse Repo Rate, Open Market Operations, etc. SLR refers to a certain percentage of reserves to be maintained in the form of gold and foreign securities. In India, SLR remains 18% by the law.

8. The accounting year of the Reserve Bank of India is: [ [1998]

Correct Answer: (b) July-June
Solution:The central bank's accounting year runs from July 1 to June 30. On 11 Mar, 1940, RBI Accounting Year changed from Jan-Dec to July-June.
About Reserve Bank of India
• The Reserve Bank of India, abbreviated as the RBI, is the Central Bank of India, meaning it is the apex body in the Indian financial system.
• It is owned by the Union Ministry of Finance.
• It acts as a regulatory body, responsible for the regulation of the Indian banking system as well as the control, issuing, and maintaining money supply in the Indian economy.
Some of its major objectives can be seen as follows:
• To regulate the issue of banknotes
• To maintain reserves with a view to securing monetary stability
• To operate the credit and currency system of the country to its advantage.
• To maintain price stability while keeping in mind the objective of growth.

9. Which one of the following is the correct sequence of decreasing order of the given currencies in terms of their value in Indian Rupees? [1998]

Correct Answer: (a) US dollar, Canadian dollar, New Zealand dollar, Hong Kong dollar
Solution:According to current scenario us dollar in the most used currency at international level, so its value is greater than other currencies of the world. Hong Kong Dollar is the second most value based dollar today.
India's ongoing efforts to promote the use of the rupee in international trade represent a step towards de-dollarisation and currency diversification. While challenges remain, the combination of export growth, capital account convertibility, and sustained economic development may pave the way for the rupee to gain currency globally.
The journey to reduce dollar dominance requires concerted efforts, and success will depend on India's resilience and adaptability in a rapidly evolving global economic landscape.
However, an increasing number of countries are recognizing the inherent risks that come with an overreliance on the dollar, including exposure to US politics, sanctions, and exchange rate volatility. As a response to these concerns, many emerging economies are actively pursuing efforts to de-dollarize their trade and diversify their currency usage.

10. The farmers are provided credit from a number of sources for their short and long term needs. The main sources of credit to the farmers include: [1999]

Correct Answer: (a) the Primary Agricultural Cooperative Societies, commercial banks, RRBs and private money lenders
Solution:Regional rural banks were established under RRB Act 1976. They provide credit to agriculture and other rural activities. As of March 2014, the number of RRBs has been reduced to 57.

Sources of agricultural credit can be broadly classified into institutional and non-institutional sources. Non-Institutional sources include moneylenders, traders and commission agents, relatives and landlords, but institutional sources include co-operatives, commercial banks including the SBI Group, RBI and NABARD. Nowadays, the long term and short term credit needs of these institutions are also being met by National Bank for Agricultural and Rural Development (NABARD).