By: Basava Uppin

Name of the Chapter External Sector/ International Institutions/ Reports

Relative Importance High
Previous Year • Prelims 2021- Foreign Direct Investment; Exchange rate Management
Questions • Prelims 2020- Gold Tranche; Global Financial Crisis; FDI-Characteristics; Present Status of
International Trade; WTI; TRIMS; External Trade- Nepal and Sri Lanka
• Prelims 2019- AIIB; Ease of Doing Business; External Debt; Rupee Depreciation; Currency Risk;
Highest Import of agricultural Commodity; GDPR; Global Competitiveness Report; Largest
Exporter of Rice
• Prelims 2018- GI Tag; Free Trade partners of ASEAN; Import of Edible Oils; ILO Convention;
• Prelims 2017- Trade Facilitation Agreement (TFA); Bilateral Trade and Investment Agreement
(BTIA); Global Infrastructure Facility; Global Gender Gap Index; Domestic content
requirement; Impact of LPG Reforms
 Prelims 2021 By: Basava Uppin
Prelims 2021
Consider the following: Consider the following statements:
1. Foreign currency convertible bonds The effect of devaluation of a currency is that it necessarily
2. Foreign institutional investment with certain conditions 1. improves the competitiveness of the domestic exports in
3. Global depository receipts the foreign markets
4. Non-resident external deposits 2. increases the foreign value of domestic currency
3. improves the trade balance
Which of the above can be included in Foreign Direct Investments?
(a) 1, 2 and 3 Which of the above statements is/are correct?
(b) 3 only (a) 1 only
(c) 2 and 4 (b) 1 and 2
(d) 1 and 4 (c) 3 only
(d) 2 and 3
Prelims 2020
If another global financial crisis happens in the near future, which of Prelims 2020
the following actions/policies are most likely to give some immunity "Gold Tranche" (Reserve Tranche) refers to
to India? (a) a loan system of the World Bank
1. Not depending on short-term foreign borrowings (b) one of the operations of a Central Bank
2. Opening up to more foreign banks (c) a credit system granted by WTO to its members
3. Maintaining full capital account convertibility (d) a credit system granted by IMF to its members

Select the correct answer using the code given below:

(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 1, 2 and 3
 Prelims 2020 By: Basava Uppin
Prelims 2020
Consider the following statements: With reference to Foreign Direct Investment in India, which
1.The value of Indo-Sri Lanka trade has consistently increased in the one of the following is considered its major characteristic?
last decade. (a) It is the investment through capital instruments
2. "Textile and textile articles" constitute an important item of trade essentially in a listed company.
between India and Bangladesh. (b) It is a largely non-debt creating capital flow.
3.In the last five years, Nepal has been the largest trading partner of (c) It is the investment which involves debt-servicing.
India in South Asia. (d) It is the investment made by foreign institutional
Which of the statements given above is/are correct? investors in the Government securities.
(a) 1 and 2 only
(b) 2 only
Prelims 2020
(c) 3 only
The term 'West Texas Intermediate', sometimes found in
(d) 1, 2 and 3
news, refers to a grade of
Prelims 2020 (a) Crude oil
With reference to the international trade of India at present, which of (b) Bullion
the following statements is/are correct? (c) Rare earth elements
1. India's merchandise exports are less than its merchandise (d) Uranium
imports.
2. India's imports of iron and steel, chemicals, fertilisers and
machinery have decreased in recent years.
3. India's exports of services are more than its imports of services.
4. India suffers from an overall trade/current account deficit.
Select the correct answer using the code given below:
(a) 1 and 2 only (b) 2 and 4 only
(c) 3 only (d) 1, 3 and 4 only
 Prelims 2020 By: Basava Uppin
Prelims 2019
With reference to Trade-Related Investment Measures (TRIMS), which The Global Competitiveness Report is published by the
of the following statements is/are correct? (a) International Monetary Fund
1. Quantitative restrictions on imports by foreign investors are (b) United Nations Conference on Trade and Development
prohibited. (c) World Economic Forum
2. They apply to investment measures related to trade in both goods (d) World Bank
and services.
3. They are not concerned with the regulation of foreign investment.
Select the correct answer using the code given below: Prelims 2019
(a) 1 and 2 only Which one of the following is not the most likely measure the
(b) 2 only Government/ RBI takes to stop the slide of Indian rupee?
(c) 1 and 3 only (a) Curbing imports of non-essential goods and promoting
(d) 1, 2 and 3 exports
(b) Encouraging Indian borrowers to issue rupee
Prelims 2019 denominated Masala Bonds
Consider the following statements : (c) Easing conditions relating to external commercial
1. Most of India's external debt is owed by governmental entities. borrowing
2. All of India's external debt is denominated in US dollars. (d) Following an expansionary monetary policy
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
 Prelims 2019 By: Basava Uppin
Prelims 2019
In the context of India, which of the following factors is/are Which of the following is issued by registered foreign
contributor/ contributors to reducing the risk of a currency crisis? portfolio investors to overseas investors who want to be part
1.The foreign currency earnings of India's IT sector of the Indian stock market without registering themselves
2. Increasing the government expenditure directly?
3. Remittances from Indians abroad (a) Certificate of Deposit
Select the correct answer using the code given below. (b) Commercial Paper
(a) 1 only (c) Promissory Note
(b) 1 and 3 only (d) Participatory Note
(c) 2 only
(d) 1, 2 and 3

Prelims 2019
With reference to Asian Infrastructure investment Bank (AIIB), consider the following
statements:
1. AIIB has more than 80 member nations.
2. India is the largest shareholder in AIIB.
3.AIIB does not have any members from outside Asia.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
 By: Basava Uppin
India’s current account was in
surplus last year for the first
Two Possibilities for BoP: Balance of Trade (BoT)
time in 17 years. Current year it
• CAD > Capital Account Surplus→ Negative BoP (Exports- Imports)
• CAD < Capital Account Surplus → Positive BoP is expected to be in deficit
If BoT is positive→ Trade Surplus
If BoT is negative→ Trade Deficit

Current Account

Usually, BoT (-ve) higher than BoI Balance of Invisibles (BoI)

BALANCE OF PAYMENT (+ve), hence Current Account • Services
(BoP) Deficit. • Income (Profit, Interest,
Systemic record of economic Dividend)
transactions between Residents • Transfers (Remittances,
and non-residents of a country India’s merchandise Trade Donations, Gifts)
for a period of one year. Balance has been negative
since 1991 Reforms.
Inflow: +Ve • Foreign Direct Investment (FDI)
Outflow: -Ve Capital Account • Foreign Portfolio Investment
(FPI)
Trends in BoP: • External Commercial
Usually, Capital Account is in
2017-18: $ 43 bn (+ve) surplus. Borrowings (ECBs)
2018-19: $ 3 bn (-ve) • Loans from multilateral
2019-20: $ 59 bn (+ve) Institutions
2020-21: > $ 87 bn ( +ve) • Banking Capital
By: Basava Uppin
 Highlights of the RBI’s Report on Remittances By: Basava Uppin
Major Destinations for Indian Migrants: United Arab Emirates (UAE), the Unites States of America (USA) and Saudi Arabia
have been the three major destinations of Indian migrants for the past two decades

Remittances into India: India continues to be the largest remittance recipient country in the world in 2021 ($87bn) and has
been so since 2008. The remittances into India account for 4% of GDP.

Compositional shift in inward remittances: The share of remittances from the Gulf region in India’s inward remittances has
declined from more than 50 per cent in 2016- 17 to about 30 per cent in 2020- 21. Further, due to steady migration of skilled
workers to the advanced economies, share of countries such as US, UK and Singapore in the overall remittances has increased
to 36 per cent in 2020-21.

Top 5 Countries receiving Remittances (in absolute value): India, China, Mexico, Philippines and Egypt.

Top 5 Countries receiving Remittances (in terms of GDP): Tonga, Lebanon, Kyrgyz Republic, Tajikistan, and El Salvador.

Top source countries for inward remittances to India: US has surpassed the UAE as the top source country, accounting for 23
per cent of total remittances in 2020-21. UAE is followed by UK, Singapore and Saudi Arabia.

States receiving highest remittances in India: Maharashtra, Kerala and Tamil Nadu.

Importance of Remittances: Remittances in India have been substantially higher than even Foreign Direct Investment (FDI)
and the flow of remittances is much less fluctuating than that of FPI.
 Prelims 2013
By: Basava Uppin
Prelims 2013
The balance of payments of a country is a systematic record of Which of the following constitute Capital Accounts?
(a) All import and export transactions of a country during a 1.) Foreign Loans
given period of time, normally a year. 2.) Foreign Direct Investment
(b) Goods exported from a country during a year. 3.) Private Remittances
(c) Economic transaction between the government of one 4.) Portfolio Investment
country to another.
(d) Capital movements from one country to another. Select the correct answer using the codes given below.
a) 1, 2 and 3 b) 1, 2 and 4
c) 2, 3 and 4 d) 1, 3 and 4

Prelims 2014
With reference to Balance of Payments, which of the following constitutes/
constitute the Current Account?
1. Balance of trade.
2. Foreign assets.
3. Balance of invisibles.
4. Special Drawing Rights.
Select the correct answer using the code given below:
(a) 1 only (b) 2 and 3 only
(b) 1 and 3 only (d) 1, 2 and 4 only
 Practice MCQ Practice MCQBy: Basava Uppin
With reference to Balance of Payments (BoP), consider the Which among the following steps can be taken to reduce the
following statements: Current Account Deficit in India?
1. The Balance of Payments (BoP) has consistently remained 1. Increase in Customs duties.
positive for India in the last 5 years. 2. Reduce Logistics Cost.
2. India’s merchandise trade balance has been in deficit since 3. Cancel all the Free Trade Agreements (FTAs)
1991 reforms.
3. India has never witnessed Current Account Surplus since 1991 Select the correct answer using the code given below:
Economic Reforms. (a) 1 only
(b) 1 and 2 only
Which of the statements given above is/are correct? (c) 2 and 3 only
(a) 1 and 2 only (d) 1, 2 and 3
(b) 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

Practice MCQ
With respect to Remittances into India, consider the following statements:
1. India receives the world’s highest remittances both in terms of absolute value and percentage of GDP.
2. USA accounts for the highest inflow of remittances into India.

Which among the following statements is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
 Practice MCQ Practice MCQ By: Basava Uppin
Which among the following can possibly lead to increase in the Which among the following transactions are recorded under
Capital Account Surplus in the BoP Account? the Capital Account as part of Balance of Payments (BoP)?
1. Foreign Investment
1. Increasing the sectoral Caps on Foreign Investment. 2. Import and Export of Goods
2. Adoption of Fed Tapering in USA 3. Remittances
3. Increase in Bond Yields in USA 4. External Commercial Borrowings (ECBs)

Select the correct answer using the code given below: Select the correct answer using the code given below:
(a) 1 only (a) 1 and 2 only
(b) 1 and 2 only (b) 2 and 3 only
(c) 1 and 3 only (c) 2 and 4 only
(d) 1, 2 and 3 (d) 1 and 4 only

Practice MCQ
Which among the following transactions would get recorded in the Balance of Payments (BoP) in India?
1. Export and Import of Goods and Services
2. Factor income earned by Indian Residents from abroad
3. Transfer payments received by Indian Residents from Non-Residents
4. Money spent by Foreign Tourists in India

Select the correct answer using the code given below:

(a) 1 only
(b) 1 and 2 only
(c) 1, 2 and 3
(d) 1, 2, 3 and 4
 By: Basava Uppin
AUTONOMOUS AND ACCOMMODATING TRANSACTIONS

Autonomous Transactions Accommodating Transactions

Meaning Occur on their own Transactions done by Central Bank
Example All Transactions recorded in Current and Capital Changes in Reserves
Account
Impact on Depends on the amount of Receipts and Payments Maintain equilibrium on the BoP
BoP
• Autonomous Receipts > Autonomous Payments-→ • BoP (+ve)→ Surplus dollars flow from Economy
Surplus on BoP (+ve) into Forex Reserves→ Increase in Forex Reserves→
Changes in Reserves denoted as –ve.
• Autonomous Receipts < Autonomous Payments-→
Deficit on BoP (-Ve) • BoP (-Ve)→ Inflow of dollars from Forex Reserves
into Economy→ Changes in the Reserves ( +ve)
Description 1. Transactions that involve Profit maximization. 1. Not based-on Profit Maximization
2. Independent of the State of BoP 2. Maintain balance in BoP
3. Above the line Items 3. Below the line items.
 By: Basava Uppin
Reserve Changes

Positive Reserve Changes Negative Reserve Changes

Autonomous Payments > Autonomous Receipts Autonomous Payments < Autonomous Receipts

Outflows > Inflows Outflows < Inflows

Negative BoP Positive BoP

Shortage of Dollars Surplus of Dollars

Forex Reserves Decreases Forex Reserves Increases

Positive Reserve Changes Negative Reserve Changes

By: Basava Uppin
 Practice MCQ Practice MCQ
By: Basava Uppin
Which among the following best explains the concept of With respect to Accommodating transactions under Balance of
Accommodating transactions under Balance of Payments Payments (BoP), consider the following statements:
(BoP)? 1. These transactions are usually carried out by the RBI to maintain
(a) All the transactions that get recorded in the Current equilibrium on BoP Account.
and Capital Account can be considered as 2. These transactions get recorded in both Current Account and Capital
Accommodating transactions. Account.
(b) Only those transactions that get recorded in the Which of the statements given above is/are correct?
Capital Account are considered as Accommodating (a) 1 only
transactions. (b) 2 only
(c) The transactions which are carried out by the RBI to (c) Both 1 and 2
maintain equilibrium on BoP Account are considered (d) Neither 1 nor 2
as Accommodating transactions.
(d) The transactions which lead to inflow of dollars into
economy are considered as Accommodating Practice MCQ
transactions. “Negative Reserve Changes” in the Balance of Payments (BoP) account is
associated with which among the following?
1. Surplus in the BoP Account
2. Higher Autonomous receipts in comparison to Autonomous payments
3. Increase in Forex Reserves.

Select the correct answer using the code given below:

(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 1, 2 and 3
 By: Basava Uppin
Net International Investment Position
 By: Basava Uppin
Net International Investment Position
 Practice MCQ Practice MCQ
By: Basava Uppin
With reference to Net International Investment Position Which among the following can possibly lead to improvement
(NIIP),which of the statements given below is/are correct? in India’s NIIP?
1. The NIIP denotes the annual flow of Assets and liabilities 1. Higher FDI inflows into India.
of a country. 2. Decrease in External Commercial Borrowings (ECBs)
2. A Positive NIIP highlights that a country is a creditor 3. Increase in non-resident deposits in India
nation.
Select the correct answer using the code given below:
Select the correct answer using the code given below: (a) 1 only
(a) 1 only (b) 1 and 3 only
(b) 2 only (c) 2 only
(c) Both 1 and 2 (d) 1, 2 and 3
(d) Neither 1 nor 2

Practice MCQ
Which among the following can worsen India’s Net International Investment Position (NIIP)?
1. Increase in External Commercial Borrowings (ECBs)
2. Increase in FDI Outflows from India
3. Decrease in NRI Deposits into India

Select the correct answer using the code given below:

(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
 Present Status of India’s External Trade By: Basava Uppin

Prelims 2020
With reference to the international trade of India at present, which of the following statements is/are
correct?
1. India's merchandise exports are less than its merchandise imports.
2. India's imports of iron and steel, chemicals, fertilisers and machinery have decreased in recent
years.
3. India's exports of services are more than its imports of services.
4. India suffers from an overall trade/current account deficit.

Select the correct answer using the code given below:

(a) 1 and 2 only
(b) 2 and 4 only
(c) 3 only
(d) 1, 3 and 4 only
Present Status of India’s External Trade By: Basava Uppin
 By: Basava
Trends in India's Merchandise Exports (in absolute Value):Uppin
In the last
decade, exports have fluctuated between a low of $262 billion (in 2015-
16) and $330 billion (in 2018-19).
Trends in India's Merchandise Exports (In terms of percentage of GDP): In
2011-12, Exports accounted for almost 17% of India's GDP. Since then,
exports as percentage of GDP has declined to 13-14%. Hence, even
though exports have crossed $ 400bn for the first time, in terms of GDP, it
is much lower than the levels in 2011-12.
Trends in India's Merchandise Trade Deficit: Except for few years (1972-
73, 1976-77), India has always registered Merchandise Trade deficit since
1947.
Top 5 Export Commodity groups ( April 2021- Mar 2022): Engineering
Goods (27%), Petroleum Goods (15%), Gems and Jewellery, Organic and
Inorganic chemicals and Pharmaceutical Drugs.
Top 5 Import Commodity groups (April 2021- March 2022): Petroleum
Products, Electronic Goods and Gold
Top 5 Export Destinations (April 2021- Mar 2022): USA, UAE, China,
Bangladesh and Netherlands
 By: Basava Uppin

MERCHANDISE TRADE DEFICIT

By: Basava Uppin
 Practice MCQ Practice MCQBy: Basava Uppin
With respect to Trends in India’s exports, consider the following Arrange the following commodity Groups in terms of their
statements: descending share in India’s exports in 2021-22
1. In terms of absolute value, exports from India have consistently 1. Petroleum Products
increased in last 5 years. 2. Engineering Goods
2. The Export-to-GDP ratio has increased to all time high in 2021-22. 3. Gems and Jewellery

Which among the statements given above is/are incorrect? Select the correct answer using the code given below:
(a) 1 only (b) 2 only (a) 1, 2 and 3
(b) Both 1 and 2 (d) Neither 1 nor 2 (b) 2, 3 and 1
(c) 2, 1 and 3
Practice MCQ (d) 3, 1 and 2
Which among the following country is the largest export
destination for India in 2021-22? Practice MCQ
(a) USA India has recently crossed exports of $ 400 bn for the first time
(b) China recently. Which among the following is/are the reasons for
(c) UAE achieving this milestone?
(d) Bangladesh 1. Increase in Prices of Exports
2. Diversification of Export Basket
3. Diversification of Export Destination

Select the correct answer using the code given below:

(a) 1 only
(b) 1 and 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
 By: Basava Uppin
Practice MCQ Practice MCQ
Consider the following statements related to India’s Consider the following statements related to Trade-to-GDP ratio:
External Trade: 1. The Trade-to-GDP ratio is calculated as Ratio of Net Export of
Goods and Services to GDP.
1. The Top 5 Export commodities from India account 2. The Trade-to-GDP ratio of India is higher than China.
for 90% of our exports.
2. The Top 5 Export commodities are mainly labour- Which among the statements given above is/are correct?
Intensive and employ unskilled and semi-skilled (a) 1 only
labour. (b) 2 only
(c) Both 1 and 2
Which of the statements given above is/are correct? (d) Neither 1 nor 2
(a) 1 only
(b) 2 only
(c) Both 1 and 2
Practice MCQ
(d) Neither 1 nor 2
Which among the following best describes the concept of Foreign trade
multiplier?
(a) Increase in GDP in response to increase in imports and exports
(b) Increase in GDP in response to increase in Exports
(c) Increase in exports in response to increase in GDP
(d) Increase in overall trade in response to increase in GDP
 FDI INTO INDIA By: Basava Uppin

Prelims 2021 Prelims 2020

Consider the following: With reference to Foreign Direct Investment in India, which
1. Foreign currency convertible bonds one of the following is considered its major characteristic?
2. Foreign institutional investment with certain conditions (a) It is the investment through capital instruments
3. Global depository receipts essentially in a listed company.
4. Non-resident external deposits (b) It is a largely non-debt creating capital flow.
(c) It is the investment which involves debt-servicing.
Which of the above can be included in Foreign Direct (d) It is the investment made by foreign institutional
Investments? investors in the Government securities.
(a) 1, 2 and 3
(b) 3 only
(c) 2 and 4
(d) 1 and 4
 By: Basava Uppin
Difference between FDI and FPI

CRITERIA FDI FPI

Percentage of Ownership 10% or more Less than 10%
What it includes? Transfer of Capital + Technology + Management Only Transfer of Capital
Skills
What it leads to? Ownership + Management Only Ownership
Where does it flow? Physical Assets and Financial Assets Financial assets
Which Segment of Primary Market Mainly Secondary Market. Can Participate
Market targeted? even in Primary Market as well.
Nature of Investment Stable and Long term Unstable and short-term ( Hot Money)
Flexibility? Less Flexible ( Entry and Exit difficult) More Flexible ( Entry and Exit easier)
Role of Investors Active Passive
 Prelims Pointers on Foreign Direct Investment (FDI) By: Basava Uppin
• Investment of 10% or more in a listed company. ( Less than 10% Investment treated as FPI)
Meaning • Investment in an unlisted Indian Company ( Irrespective of threshold)

Who can receive • Companies, Partnership Firms, Venture Capital Funds, Limited Liability Partnerships (LLPs), Startup etc.
FDI into India?
Government Route: Application in Foreign Investment Facilitation Portal→ Concerned Administrative
Ministry/Department. Proposals of more than Rs 5000 crores to be approved by CCEA.
Routes
Automatic Route: No Prior Approval of the Government or RBI

NOTE: FDI from a country with which India shares border is allowed only under Approval route.
Eligible Shares; Warrants; Fully, compulsorily & mandatorily convertible debentures; Foreign Currency Convertible bonds
Instruments (FCCBs); Foreign Currency Exchangeable bonds; Depository Receipts
Prohibited Sectors Lottery Business; Gambling and betting including casinos; Chit funds and Nidhi company; Trading in Transferable
Development Rights (TDRs); Real Estate Business or Construction of Farm-Houses; Manufacturing of Cigars; Activities/
sectors not open to private sector investment viz., (i) Atomic energy and (ii) Railway operations
Sectoral Cap • Composite Cap of all foreign Investment i.e., both FDI and FPI
Important Pointers • Countries attracting highest FDI: USA ($ 250 bn); China; Hong Kong, Singapore and India- placed at 5th Position)
for Prelims • Trends: India received its highest ever FDI inflows of around $ 83 bn in 2021-22
• Top FDI Sources for FDI (2021-22): Singapore, USA and Mauritius
• Sectors attracting highest FDI: Computer Software & Hardware, Infrastructure
• States attracting highest FDI Inflows: Karnataka, Maharashtra and Delhi.
By: Basava Uppin
 Sector Sectoral Cap Entry Route
By: Basava Uppin
Construction, operation and maintenance of the Railway Infrastructure: High Speed Trains, Dedicated Freight 100% Automatic Route
Corridors, Metro projects, Signalling and Electrification etc.
FDI in Agriculture in following activities only: 100% Automatic
• Floriculture, Horticulture, and Cultivation of Vegetables & Mushrooms under controlled conditions;
• Development and Production of seeds and planting material;
• Animal Husbandry, Pisciculture, Aquaculture, Apiculture;
• Services related to agro and allied sectors
FDI in Plantation Sector- Tea, Coffee, Rubber, Cardamom, Palm oil, Olive Oil ( FDI in Only these Plantations 100% Automatic
allowed)
Construction of Development Projects (Townships, Residential/Commercial Properties etc.) 100% Automatic Route

Establishment and Operation of Satellites 100% Government Route

Telecommunication 100% Automatic Route

Cash and Carry Wholesale Trading 100% Automatic Route

E-Commerce 100% Automatic

Inventory Based Model ( Not Permitted)
Market Place Model ( Permitted)
Public Sector Banks 20% Government Route

Private Sector Banks 74% Automatic up to 49%; Beyond

49%- Government Route
Insurance and Pension 74% Automatic Route

Multi-brand Retail 51% Government Route

Single Brand Retail 100% Automatic Route

 By: Basava Uppin
Recent Changes in FDI Policy Details
100% FDI in Coal Mining and Coal processing plants such • Earlier, allowed FDI in Coal Mining only for Captive
as Coal Washery Consumption. Now, allowed to sell coal in Open Market
100% FDI in Contract Manufacturing under Automatic Earlier, no specific Provision for Contract Manufacturing.
Route Now, it has been explicitly provided.
74% FDI in Insurance Sector Earlier, it was up to 49%.

100% FDI In Telecom Sector under Automatic Route Earlier: Automatic up to 49% Government Route beyond 49%

100% FDI in Defence under Automatic Route Earlier: Automatic up to 49%; Government Route beyond 49%
 Practice MCQ Practice MCQ By: Basava Uppin
Which among the following can be considered as Foreign Direct Which among the following instruments is/are eligible to be considered
Investment (FDI) in India? as Foreign Direct Investment into India?
1. A foreign Company making an Investment of 10% or more 1. Masala Bonds
in a listed Indian Company. 2. Foreign Currency Convertible Bonds (FCCBs)
2. A foreign Company making investment in unlisted Indian 3. Fully Convertible Debentures
Company. 4. American Depository Receipts (ADRs)

Select the correct answer using the code given below: Select the correct answer using the code given below:
(a) 1 only (a) 1 and 2 only
(b) 2 only (b) 2 and 3 only
(c) Both 1 and 2 (c) 2, 3 and 4 only
(d) Neither 1 nor 2 (d) 1, 2, 3 and 4

Practice MCQ Practice MCQ

In which among the following sectors is the FDI prohibited in With reference to Foreign Direct Investment (FDI), which among the
India? following statements is incorrect?
1. Public Sector Banks (a) Under approval route, approval must be taken from the
2. Digital Media concerned Ministry/ Department.
3. Manufacture of Cigarettes (b) The Sectoral Cap imposed by the Government is a composite cap
4. Railway Infrastructure on both FDI and FPI
(c) FDI is prohibited in Agriculture Sector
Select the correct answer using the code given below: (d) FDI is not allowed in Inventory based Model of E-Commerce
(a) 1 only
(b) 2 and 3 only
(c) 3 only
(d) 3 and 4 only
 Practice MCQ Practice MCQ By: Basava Uppin
Consider the following statements related to Trends in Foreign In which among the following agricultural activities is FDI allowed in
Direct Investment (FDI) into India: India?
1. India has received the highest ever FDI inflows in 2021-22. 1. Cultivation of all Cereal Crops
2. India is among the top 5 countries in terms of global FDI 2. Investment in certain Plantation sector such as Tea and Coffee
inflows. 3. Cultivation of horticultural products under controlled conditions.
3. In terms of source of FDI, USA accounts for the highest 4. Development and production of Seeds and Planting Material
share.
Select the correct answer using the code given below:
Which among the statements given above is/are correct? (a) 1 and 2 only
(a) 1 only (b) 2 and 3 only
(b) 1 and 2 only (c) 4 only
(c) 3 only (d) 2, 3 and 4 only
(d) 1, 2 and 3
Practice MCQ
Practice MCQ
Which among the following Indian Entities is/are eligible to receive FDI
Consider the following statements:
in India?
1. Both FDI and FPI can involve investments in Equity shares
1. Companies registered under Companies Act, 2013
of an Indian Entity.
2. Trusts registered in India
2. FPI is considered to be more volatile than FDI.
3. Partnership Firms
3. FDI is considered to be long term in comparison to FPI.
4. Limited Liability Partnerships
5. Start Ups
Which among the statements given above is/are correct?
(a) 1 only
Select the correct answer using the code given below:
(b) 1 and 2 only
(a) 1 only (b) 1 and 2 only (c) 1, 3 and 4 only. (d) 1, 3, 4 and 5 only
(c) 2 and 3 only
(d) 1, 2 and 3
By: Basava Uppin
Stages of Trade Integration By: Basava Uppin

Economic Union

Common
Market

Customs Union

CECA/CEPA

Free Trade
Agreement

Preferential
Trade
Agreement
 By: Basava Uppin
EXTERNAL SECTOR
Practice MCQ Practice MCQ
In which among the following ways is The Early Harvest Scheme (EHS), sometimes
Comprehensive Economic Cooperation seen in news deals with which among the
Agreement (CECA) different from Free Trade following?
Agreement (FTA)? (a) Provision of Early Harvest seeds to
Farmers
1. Unlike FTA, CECA is more comprehensive (b) Precursor to implementation of FTA
and includes other areas such as Services, (c) Promotion of Start-up Ecosystem
Investment, Government procurement (d) Promotion of Rural Enterprises.
etc.

2. CECA provides for mutual recognition

agreements (MRAs) that covers the
regulatory regimes of the partners.

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
 By: Basava Uppin
EXTERNAL SECTOR
Practice MCQ

Consider the following stages of Trade

Integration between the two countries:
1. Free Trade Agreement (FTA)
2. Preferential Trade Agreement (PTA)
3. Common Market
4. Customs Union
5. Economic Union

Which among the following correctly

depicts the ascending order of Trade
Integration?
(a) 2, 1, 4, 3, 5
(b) 2, 1, 3, 4, 5
(c) 1, 2, 3, 4, 5
(d) 2, 1, 3, 5, 4
 Regional Trading Agreements By: Basava Uppin

Sl. No Regional Trading Agreements Member Countries

1 Agadir Agreement Egypt, Morocco, Jordon and Tunisia
2 Andean Community Bolivia, Colombia, Ecuador and Peru
3 Asia Pacific Trade Agreement India, China, Bangladesh, Laos, Sri Lanka, South Korea. ( Mongolia: 7th Member)
4 Caribbean Community and 15 Member countries in Caribbean Islands: Bahamas, Barbados, Belize, Jamaica,
Common Market (CARICOM) Trinidad and Tobago etc.
5 Common Market for Eastern 21 Member Countries in Eastern and Southern Africa
and Southern Africa (COMESA)
6 Commonwealth of Independent Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia,
States Tajikistan, Turkmenistan, Uzbekistan and Ukraine
7 Comprehensive and Progressive 11 Member Countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico,
Agreement for TPP (CPTPP) New Zealand, Peru, Singapore and Vietnam
8 Eurasian Economic Union Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan
9 European Free Trade Iceland, Liechtenstein, Norway and Switzerland
Association (EFTA)
10 Gulf Cooperation Council Saudi Arabia, UAE, Bahrain, Oman, Qatar, Kuwait,
 By: Basava Uppin
Regional Trading Agreements

Sl. Regional Trading Agreements Member Countries

No
11 Mercosur Argentina, Brazil, Paraguay and Uruguay ( Venezuela- Suspended)
12 South African Customs Union South Africa, Namibia, Botswana, Lesotho, Eswatini (Swaziland)
13 North Africa Free Trade USA, Canada and Mexico
Agreement (NAFTA)
14 ASEAN Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore,
Thailand, and Vietnam.
15 South Asian Free Trade Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka
Agreement (SAFTA)
 List Of FTAs signed by India By: Basava Uppin
SL . PTAs in force SL . FTAs in force SL . On-going Trade Negotiations
No No No
1 Asia Pacific Trade Agreement 1 India- Sri Lanka 1 India –EU BTIA
(APTA) 2 SAARC FTA 2 India- Sri Lanka Economic and
2 India- Afghanistan Technical Cooperation
3 India Nepal Treaty of Trade
3 India-Mercosur Agreement (ETCA)
4 India- Bhutan Agreement on Trade,
4 India-Chile Commerce and Transit 3 India- EFTA Trade and Economic
Partnership Agreement
5 India-Thailand FTA- Early Harvest
Scheme (EHS) 4 India- New Zealand FTA

6 India – ASEAN FTA 5 India- SACU PTA

7 India - South Korea CEPA 6 BIMSTEC CECA

8 India - Japan CEPA 7 India – GCC Framework

Agreement
9 India - Malaysia CECA
8 India – Iran PTA
10 India-Singapore CECA
11 India-Mauritius CECPA
12 India-UAE CEPA
13 India-Australia ECTA
 By: Basava Uppin

Types of Exchange Rate Systems

Floating Exchange Rate • Currency is allowed to freely appreciate or depreciate depending upon the market forces
System • The Central Bank of the Country does not intervene in forex market. ( No Devaluation/ Revaluation)
• Currency is allowed to freely appreciate or depreciate depending upon the market forces during the
Dirty Float/ Managed normal circumstances.
Exchange Rate • In case of large-scale volatility, the Central Banks may intervene in Forex Market ( Devaluation/
Revaluation takes place)
• Value of the currency is pegged to the other currency (Mainly Dollars)
• Example: Saudi Arabia: $ 1= 3.75 Riyal (1986); $1 = 3.67 Dirham (1997); 1 US $ = 7.8 HK $ ( HK $
Fixed/ Pegged Exchange
allowed to vary between 7.75 and 7.83);
Rate
• 1 Nepali Rupee = 0.63 Indian Rupee (1992); 1 Bhutanese Ngultrum = Re. 1 (1974) (Dual Currency
System in Bhutan)
 By: Basava Uppin

Prelims 2012
The price of any currency in international market is decided
by:
1. The World Bank.
2. Demand for goods/services provided by the country
concerned.
3. Stability of the government of the concerned country.
4. Economic potential of the country in question.

Select the correct answer using the code given below:

(a) 1, 2, 3, 4
(b) 2 and 3 only
(c) 3 and 4 only
(d) 1 and 4 only
By: Basava Uppin
 Practice MCQ Practice MCQ
Which among the following reasons could lead to Rupee
By: Basava Uppin
Which among the following can be considered as effects of Rupee
Depreciation? Depreciation in India?
1. Decline in Exports 1. Increase in rate of Inflation.
2. Increase in Imports 2. Decrease in cost of external borrowings.
3. Increase in rate of Interest in US 3. Decrease in Current Account Deficit (CAD).
4. Increase in Inflation within India 4. Increase in export competitiveness.

Select the correct answer using the code given below: Select the correct answer using the code given below:
(a) 1 and 2 only (a) 1 and 2 only
(b) 2 and 3 only (b) 2 and 3 only
(c) 3 and 4 only
(c) 1,2 and 3
(d) 1 and 4 only
(d) 1,2,3 and 4
Practice MCQ
Practice MCQ
The "Dutch Disease" in the field of economics is associated with
Which among the following steps can be taken in order to which among the following?
counter Rupee Depreciation? (a) Under-developed manufacturing sector in the developing
1. Imposition of higher import duties. countries
2. Enhancing FDI limit in various sectors. (b) Adverse impact of colonization on poor and developing
3. Restrictions on Capital Outflows. countries
4. Sale of Dollars from the Forex Reserves. (c) Adverse impact on the economy due to large scale appreciation
in the domestic currency.
Select the correct answer using the code given below: (d) Economic problems caused due to fixed exchange rate system
(a) 1 and 2 only (b) 1 and 3 only
(c) 1,2 and 3 only (d) 1,2,3 and 4
 Prelims 2021 Practice MCQ By: Basava Uppin
Consider the following statements: Which among the following steps the RBI/Government is not likely to
The effect of devaluation of a currency is that it necessarily take to counter Rupee Appreciation?
1. improves the competitiveness of the domestic exports in 1. Enhancing FPI limit in G-Secs.
the foreign markets 2. Buy Dollars from Market
2. increases the foreign value of domestic currency 3. Liberalized norms on External Commercial Borrowings (ECBs)
3. improves the trade balance
Select the correct answer using the code given below:
Which of the above statements is/are correct? (a) 1 and 2 only
(a) 1 only (b) 3 only
(b) 1 and 2 (c) 1 and 3 only
(c) 3 only (d) 1, 2 and 3
(d) 2 and 3

Practice MCQ
Which among the following can be considered as "Rupee
Devaluation"?
(a) Increase in value of Rupee due to higher inflows of Dollar
(b) Decrease in value of Rupee due to higher outflows of Dollar
(c) Decrease in value of Rupee due to injection of Dollars by
RBI
(d) Decrease in value of Rupee due to buying of dollars by RBI.
By: Basava Uppin
 By: Basava Uppin
Criteria Currency War Reverse Currency War
Meaning Competitive Devaluation Competitive Revaluation
Why is it adopted? Boost Exports Reduce cost of Imports
Action taken by Buy Dollars from the domestic Sell Dollars in the domestic Market
Central Bank Market
Impact on Currency Dollar value increase Dollar value reduces
Domestic Currency’s Value reduces Domestic Currency’s Value Increases
 REVERSE CURRENCY WAR By: Basava Uppin

Practice MCQ Practice MCQ

With reference to “Reverse Currency War”, sometimes seen Which among the following is/are the likely effects of “Reverse Currency
in news, consider the following statements: War”?
1. Under “Reverse Currency War”, countries devalue their 1. Decrease in value of Currencies of Emerging Economies.
domestic currency to reduce cost of the imports. 2. Increase in value of dollar
2. The ”Reverse Currency War” comes into being due to 3. Decrease in cost of imports for the emerging economies
adoption of Quantitative Easing Policy of US Fed Bank.
3. The Reverse Currency War may lead to decrease in dollar Select the correct answer using the code given below:
value vis-à-vis domestic currencies. (a) 1 and 2 only
(b) 2 only
Which among the statements given above is/are correct? (c) 2 and 3 only
(a) 1 only (d) 3 only
(b) 1 and 2 only
(c) 3 only
(d) 2 and 3 only
 Rupee Convertibility By: Basava Uppin

Rupee Convertibility
What does it mean? • Ability to convert Rupee into Foreign Currency and Vice-versa without any unnecessary restrictions.
Full Rupee Convertibility • Easier to convert Rupee into Foreign Currencies or vice versa for Current account transactions such as
in Current Account Imports, Exports, Remittances etc.
Transactions • Allowed in India since 1993
• Capital Account convertibility: Currency Convertibility + Freedom to invest in Financial Assets of other
Countries and vice-versa.
Partial Rupee
Restrictions in India
Convertibility in Capital
• Restrictions on FDI: Sectoral Cap, List of Prohibited Sectors, Government Route
Account
• Restrictions on FPI: Individual and Aggregate FPI Limit, FPI Limit in G-Secs and Corporate Bonds etc.
• External Commercial Borrowings: RBI sets annual limits.
 Capital Account Convertibility By: Basava Uppin

Tarapore Committee has recommended that India should Capital Account Convertibility in a phased and gradual manner. Conditions
needed:
1. Eliminate Revenue Deficit and ensure Revenue surplus
2. Strengthen the Regulation of Financial sector
3. To meet import and debt service payments, forex reserves should be adequate enough.

Capital account liberalization should be regarded as a process and not an event i.e., it should be introduced in a phased and gradual manner.
 INDIA’S FOREX RESERVES By: Basava Uppin

Prelims 2013 Prelims 2020

Which one of the following groups of items is included in "Gold Tranche" (Reserve Tranche) refers to
India's foreign-exchange reserves? (a) a loan system of the World Bank
(a) Foreign-currency assets, Special Drawing Rights (SDRs) (b) one of the operations of a Central Bank
and loans from foreign countries. (c) a credit system granted by WTO to its members
(b) Foreign-currency assets, gold holdings of the RBI and (d) a credit system granted by IMF to its members
SDRs.
(c )Foreign-currency assets, loans from the World Bank and
Prelims 2016
SDRs.
Which of the following best describes the term ‘import
(d) Foreign-currency assets, gold holdings of the RBI and
cover’, sometimes seen in the news? ( Prelims 2016)
loans from the World Bank.
(a) It is the ratio of value of imports to the Gross Domestic
Product of a country
(b) It is the total value of imports of a country in a year
(c) It is the ratio between the value of exports and that of
imports between two countries
(d) It is the number of months of imports that could be paid
for by a country’s international reserves
 Forex Reserves By: Basava Uppin

Important Aspects of Forex Reserves

Assets which are readily available to the RBI for financing BoP or for intervention in the forex market to check
Meaning exchange rate volatility.
• Foreign exchange assets (Currency, Investment in Foreign G-Secs, Deposits with Other Central Banks and
BIS; Deposits with the overseas branches of commercial Banks);
• Monetary gold
Components
• SDR holdings
• Reserve position in the IMF.
Note: Foreign exchange reserves are denominated and expressed in US dollar terms
Countries with highest • China ( $ 3200 bn) > Japan > Switzerland > India > Russia
Forex Reserves • India: $ 560 bn ( 4th Position as of December 2022)
Components of Forex • Foreign Currency Assets (FCA) > Gold > SDRs > Reserve Position in IMF
Reserves in India
Adequacy of Reserves • Import Cover: Number of months of imports that could be paid for by Forex reserves.
• Reserve Cover of External Debt: What Percentage of External Debt can be paid by Forex Reserves?
• Greenspan-Guidotti rule: Forex Reserves should be sufficient to pay the short-term External Debt.