Q1. “Rapid Financing Instrument” and “Rapid Credit Facility” are related to the provisions of lending by which one of the following ?
(a) Asian Development Bank
(b) International Monetary Fund
(c) United Nations Environment Programme Finance Initiative
(d) World Bank
Answer (B)
Provisions of lending by the IMF Standby Credit Facility:
1. The Standby Credit Facility (SCF) provides financial assistance to low-income countries (LICs) with short-term balance of payments needs.
2. Stand-By Arrangement (SBA): In an economic crisis, countries often need financing to help them overcome their balance of payments problems. Since its creation in June 1952, the IMF’s Stand-By Arrangement (SBA) has been the workhorse lending instrument for emerging and advanced market countries.
3. Rapid Financing Instrument (RFI): The Rapid Financing Instrument (RFI) provides rapid financial assistance, which is available to any IMF member countries facing an urgent balance of payments need.
4. Extended Fund Facility (EFF): When a country faces serious medium-term balance of payments problems because of structural weaknesses that require time to address, the IMF can assist through an Extended Fund Facility (EFF).
5. Rapid Credit Facility (RCF): The Rapid Credit Facility (RCF) provides rapid concessional financial assistance to low-income countries (LICs) facing an urgent balance of payments need with no ex-post conditionality where a full-fledged economic program is neither necessary nor feasible.
6. Flexible Credit Line (FCL): The Flexible Credit Line (FCL) was designed to meet the demand for crisis-prevention and crisis-mitigation lending for countries with very strong policy frameworks and track records in economic performance.
7. Short-term Liquidity Line (SLL): The Short-term Liquidity Line (SLL) is designed to be a liquidity backstop for members with very strong policy frameworks and fundamentals.
8. Precautionary and Liquidity Line (PLL): The Precautionary and Liquidity Line (PLL) is designed to flexibly meet the liquidity needs of member countries with sound economic fundamentals but with some remaining vulnerabilities.
9. Resilience and Sustainability Facility (RSF): The Resilience and Sustainability Facility (RSF) complements the existing IMF lending toolkit by helping low-income and vulnerable middle-income countries address longer-term challenges, including those related to climate change and pandemic preparedness.
Q2. With reference to the Indian economy, consider the following statements :
1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Which of the above statements are correct ?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Solution C
The nominal effective exchange rate (NEER) and the real effective exchange rate (REER) are both indicators of a nation’s competitiveness in relation to its trading partners.
What Is the Real Effective Exchange Rate (REER)?
The real effective exchange rate is a measure of the relative strength of a nation’s currency in comparison with those of the nations it trades with. It is used to judge whether the nation’s currency is undervalued or overvalued or, ideally, fairly valued. In other words, the real effective exchange rate (REER) is the weighted average of a country’s currency in relation to an index or basket of other major currencies.
An increase in a nation’s REER is an indication that its exports are becoming more expensive and its imports are becoming cheaper. It is losing its trade competitiveness.
What Does a High REER Mean?
An increase in a nation’s REER means businesses and consumers have to pay more for the products they export, while their own people are paying less for the products that it imports. It is losing its trade competitiveness.
The nominal effective exchange rate (NEER)
NEER is the average rate at which one nation’s currency is valued in comparison with a basket of other currencies, weighted for the percentage of trade that each currency represents to that nation.
The NEER can be adjusted to compensate for the inflation rate in the home country. That adjusted number is the REER.
Q3. With reference to the Indian economy, consider the following statements :
1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Which of the statements given above are correct ?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Solution B
Inflation measures the average price change in a basket of commodities and services over time. Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency.
Statement 1 is not correct: A central bank such as Reserve Bank of India (RBI), periodically intervenes in the debt market to influence the interest rates and rate of inflation in the economy. If RBI feels inflation is too high, it will sell government securities, and suck money out of the system. This act will push up interest rates in the economy, and business will cut back on capital expenditure financed by loans, reducing the demand for money.
Statement 2 is correct: Central banks also intervene periodically in foreign exchange markets. If the rupee is rapidly depreciating, RBI will sell dollars in the market. This will increase the supply of dollars and the demand for rupees, causing the rupee price of the dollar to come down. On the contrary, if the rupee is rapidly appreciating, RBI will buy dollars and inject rupees into the economy. This will increase the demand for dollars and the supply of rupees, thereby leading to an increase in the rupee price of the dollar.
Statement 3 is correct: Interest rate movements in a foreign economy can stimulate action on the part of RBI. If interest rates in the US or the EU were to fall, FIIs (Foreign Institutional investors) will ramp up investments in India. The resultant demand for rupees will cause the rupee to appreciate. In response, RBI will buy dollars and inject rupees in to the system.
Q4. With reference to the “G20 Common Framework”, consider the following statements:
It is an initiative endorsed by the G20 together with the Paris Club.
2. It is an initiative to support Low Income Countries with unsustainable debt.
Which of the statements given above is/are correct ?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Solution C
The Common Framework for debt treatment beyond the DSSI (Common Framework) is an initiative endorsed by the G20, together with the Paris Club, to support, in a structural manner, low income countries with unsustainable debt. It is a way to temporarily ease the financing constraints for these countries and free up scarce money that they can instead use to mitigate the human and economic impact of the COVID-19 crisis.
Q5. With reference to the Indian economy, what are the advantages of “Inflation-Indexed Bonds (IIBs)” ?
1. Government can reduce the coupon rates on its borrowing by way of IIBs.
2. IIBs provide protection to the investors from uncertainty regarding inflation.
3. The interest received as well as capital gains on IIBs are not taxable.
Which of the statements given above are correct ?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Solution A
Inflation-linked bonds are designed to help protect investors from the negative impact of inflation by contractually linking the bonds’ principal and interest payments to a nationally recognized inflation measure such as the wholesale price index (WPI). Inflation-indexed bonds in India were issued by the Reserve Bank of India (RBI) in 2013 and were benchmarked to Wholesale Price Index (WPI).
Statement 1 is correct: Inflation indexed bonds could reduce government borrowing costs. If the market overestimates future inflation, government will reduce borrowing costs by issuing inflation indexed bonds rather than nominal bonds.
Statement 2 is correct: Interest rate will be provided protection against inflation by paying fixed coupon rate on the principal adjusted against inflation.
Statement 3 is not correct: Extant tax provisions will be applicable on interest payment and capital gains on IIBs. There will be no special tax treatment for these bonds.
Q6. With reference to foreign-owned e-commerce firms. operating in India, which of the following statements is/are correct ?
1. They can sell their own goods in addition to offering their platforms as market-places.
2. The degree to which they can own big sellers on their platforms is limited.
Select the correct answer using the code given below :
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Solution B
Statement 1 is not correct: Consumer Protection (E-Commerce) Rules, 2020 define e-commerce entity (also foreign owned) as any person who owns, operates or manages digital or electronic facility or platform for electronic commerce, but does not include a seller offering his goods or services for sale on a marketplace ecommerce entity.
Marketplace based model of e -commerce means providing an IT platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.
Inventory based model of e -commerce means an e -commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly. However, FDI is not permitted in inventory based model of e-commerce.
Statement 2 is correct. According to guidelines for FDI (Foreign Direct Investme nt) on E -Commerce, E-commerce entity providing a marketplace will not exercise ownership or control over the inventory i.e. goods purported to be sold. Such an ownership or control over the inventory will render the business into inventory based model. Inventory of a vendor will be deemed to be controlled by e -commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies.
Q7. Which of the following activities constitute a real sector in the economy ?
1. Farmers harvesting their crops
2. Textile mills converting raw cotton into fabrics
3. A commercial bank lending money to a trading company
4. A corporate body issuing Rupee Denominated Bonds overseas
Select the correct answer using the codes given below
(a) 1 and 2
(b) 2, 3 and 4 only
(c) 1, 3 and 4 only
(d) 1, 2, 3 and 4
Solution A
There are three sectors of domestic economy:
1.General government sector
2. Real sector
3. Financial sector
The real sector of the economy consists of enterprises (nonfinancial corporations), households and nonprofit institutions serving households.
1. NonFinancial Corporations Sector: Non Financial organizations comprise all resident units involved in production of market goods and non financial services. Ex: enterprises of full partnership, limited partnership, share holding companies, trade cooperatives etc.
2. Households Sector: This sector consists of all resident households. Households are those individuals or groups of persons.
3. Nonprofit Institutions Serving Households Sector: This sector comprises noncommercial organizations engaged in production of non market goods and services. Ex: political parties, churches, religious organizations, charities, professional and other unions, cultural organizations, some educational and research institutions, etc.
Q8. Which one of the following situations best reflects “Indirect Transfers” often talked about in the media recently with reference to India ?
(a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
(b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
(c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
(d) A foreign company transfers shares and such shares derive their substantial value from assets located in India
Solution D
Indirect transfers refer to situations where when foreign entities own shares or assets in India, the shares of such foreign entities are transferred instead of a direct transfer of the underlying assets in India.
The origin of retrospective taxation can be traced backed to 2012, When Vodafone Ltd. was retrospectively taxed by the Indian tax authorities for a 2007 deal. The 2012 act had amended the IT act to impose tax liability on the income earned from the sale of shares of a foreign company on a retrospective basis (i.e., also applicable to the transactions done before May 28, 2012). The amendments made by the 2012 Act clarified that if a company is registered or incorporated outside India, its shares will be deemed to be or have always been situated in India if they derive their value substantially from the assets located in India. As a result, the persons who sold such shares of foreign companies before the enactment of the Act (i.e., May 28, 2012) also became liable to pay tax on the income earned from such sale.
The Taxation Laws (Amendment) Act, 2021 nullifies the ‘retrospective taxation’ that was introduced with the Finance Act of 2012. It nullifies this tax liability imposed on such persons provided they fulfil certain conditions.
These conditions are:
1. if the person has filed an appeal or petition in this regard, it must be withdrawn or the person must submit an undertaking to withdraw it,
2. if the person has initiated or given notice for any arbitration, conciliation, or mediation proceedings in this regard, the notices or claims under such proceedings must be withdrawn or the person must submit an undertaking to withdraw them.
3. the person must submit an undertaking to waive the right to seek or pursue any remedy or claim in this regard, which may otherwise be available under any law in force or any bilateral agreement.
The Act ensures that there cannot exist any future demand by the government for the collection of taxes on the basis of an amendment with retrospective effect. This Act makes the tax regime of India more predictable, increasing the scope of foreign investment into the country as it clarifies the stance of Indian Government on imposition of retrospective taxation.
Q9. With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct ?
1. Acquiring new technology is capital expenditure.
2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.
Select the correct answer using the code given below :
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Solution: A
Statement 1 is correct: Capital expenditures are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. Capital Expenditure is often used to undertake new projects or investments by a company. Costs to upgrade or purchase software, investing in new technology and computer equipment, are considered part of Capital expenditure. As they are often employed to improve operational efficiency, increase revenue in the long term, or make improvements to the existing assets of a company.
Statement 2 is not correct: When a company borrows money to be paid back at a future date with interest it is known as debt financing. It occurs when a firm sells fixed income products, such as bonds, bills, or notes. It could be in the form of a secured as well as an unsecured loan. Debt financing is the opposite of equity financing, which entails issuing stock to raise money. Both debt financing and equity financing are considered as part of capital receipts for the company, as capital receipts are receipts that create liabilities or reduce financial assets. Funds from these would be used by company for capital expenditure such as to grow or expand its operations.
Q10. With reference to the Indian economy, consider the following statements :
1. A share of the household financial savings goes towards government borrowings.
2. Dated securities issued at market-related rates in auctions form a large component of internal debt.
Which of the above statements is/are correct ?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Solution C
Statement 1 is correct: Household financial savings refer to currency, bank deposits, debt securities, mutual funds, pension funds, insurance, and investments in small savings schemes by households. The net household financial savings was 11.5 percent of GNDI (gross national disposal income) in 2020- 21. A part of this financial saving goes toward government borrowing.
As government borrows through the issue of government securities called G-secs and Treasury Bills. It borrows from the market, small savings funds, state provident funds, external assistance and short-term borrowings. Any adverse movement in the household savings will have a significant bearing on banks, insurance companies and mutual/provident funds, who, in turn, are key investors in government securities.
The Central Government Debt includes all liabilities of Central Government contracted against the Consolidated Fund of India (defined as Public Debt). Public debt is further classified into internal and external debt.
Internal debt consists of marketable debt and non-marketable debt. Marketable debt comprises of Government dated securities and Treasury Bills, issued through auctions. Nonmarketable debt comprises of intermediate Treasury Bills (14 days ITBs) issued to State Governments/UTs as well as select Central Banks, special securities issued against small savings, special securities issued to public sector banks/EXIM Bank, securities issued to international financial institutions, and compensation and other bonds.
Statement 2 is correct: Dated securities issued at marketrelated rates in auctions form a large component of internal debt. . As at end-March 2021, outstanding amounts under dated securities stood at 36.3 per cent of GDP and accounted for 68.1 per cent of the total Public Debt.