Balance of Payments (BoP) is part of External Sector of Economy. Below are notes on 43 sub-topics, followed by practice MCQs from State PSC and UPSC papers.
Components of BoP: Capital Account (FDI, FII, External Borrowings, NRI Deposits)
- Balance of Payments (BoP) records all international economic transactions, encompassing both current and capital accounts.
- Balance of Trade (BoT) specifically records only visible (merchandise) goods transactions.
- An Indian businessperson buying shares in a foreign company is an international financial transaction (capital outflow), recorded in the Capital Account of BoP, not in the Balance of Trade.
- The Capital Account includes Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI, formerly FII), External Borrowings (e.g., External Commercial Borrowings ECB), and Non-Resident Indian (NRI) Deposits.
- India's external debt is predominantly owed by non-governmental (corporate) entities, not primarily by governmental entities.
- India's external debt is denominated in multiple currencies, not exclusively in US dollars.
- Regarding India's external debt currency composition (as of December 2021 context), the US Dollar is the largest component, followed by the Indian Rupee as the second largest.
Components of BoP: Current Account (Goods, Services, Income, Transfers)
- Balance of Payments (BoP) A systematic record of all economic transactions between residents of a country and the rest of the world during a specific period.
Current Account
Records transactions that do not create future claims (i.e., do not affect assets/liabilities).
1. Goods (Visible Trade / Merchandise)
- Exports and imports of physical goods.
Debit
Imports of goods (outflow of foreign exchange).
Credit
Exports of goods (inflow of foreign exchange).
- Terms like 'Agreement on Agriculture', 'Agreement on the Application of Sanitary and Phytosanitary Measures', and 'Peace Clause' are associated with the
World Trade Organization
(WTO), which governs trade
in goods.
- India is a member of the International Grains Council (IGC), but membership is not required for exporting or importing rice and wheat.
- Local Currency Agreements India and UAE signed a Memorandum of Understanding (MoU) for a framework for trade settlements in their respective national currencies (INR and AED). This agreement was signed by the RBI Governor and the Governor of the Central Bank of UAE.
2. Services (Invisible Trade)
- Exports and imports of nonfactor services (e.g., tourism, transportation, software, financial services, insurance).
Debit
Payment for services received from non-residents (e.g., Indian paying for foreign tour).
Credit
Receipts for services provided to non-residents (e.g., earnings from software exports, foreign tourist spending in India).
Technical Assistance
Often provided by international agencies, falls under services.
3. Income (Factor Income)
- Investment income (e.g., interest, dividends, profits) and compensation of employees.
Credit
Income earned by residents from investments abroad (e.g., dividends from foreign stocks) or wages/salaries earned abroad.
Debit
Income paid to non-residents for their investments in the domestic economy or wages/salaries paid to non-residents.
4. Transfers (Unilateral Transfers)
- Receipts and payments for which there is no economic value exchanged (no quid pro quo).
Credit (Receipts)
Remittances from non-resident Indians (NRIs), grants received from foreign governments/ agencies, gifts.
Debit (Payments)
Grants given to foreign countries (e.g., India's $5 million grant to Tajikistan in 2001 to tackle drought), gifts to non-residents.
Remittances
India was the world's largest recipient of remittances in 2021 ($87 billion); the USA was the biggest source (20% of India's remittances). India is followed by China, Mexico, Philippines, and Egypt.
- Non-Resident
External
(NRE) Accounts Can be opened by NRIs and Overseas Corporate Bodies (OCBs) with authorized dealers and banks in all forms of demand and term deposits. NRE accounts are Rupee-denominated; foreign currency remitted from abroad is converted to INR upon deposit.
Debit Entry
Represents an outflow of foreign exchange. (e.g., Imports of goods by India).
Credit Entry
Represents an inflow of foreign exchange. (e.g., Income from Indian investments abroad, Receipts of transfer payments, Exports of services by India).
Foreign Exchange Regulation Act (FERA) was replaced by the Foreign Exchange Management Act (FEMA).
Act (FEMA).
- International agencies funding development programs in India often provide Technical assistance, Soft loans (Capital Account), Grants, and Food assistance.
- Visa Waiver Agreements Such as the one signed between India and Moldova for diplomatic passports in May 2024, facilitate travel and can indirectly influence services trade.
Components of BoP: Financial Account (Official Reserve Account)
- Official Reserve Account (ORA): Part of the Financial Account in the Balance of Payments (BoP); records transactions in reserve assets held by the central bank.
- Foreign Exchange Reserves (Forex Reserves): External assets in foreign currencies, gold, Special Drawing Rights (SDRs), and the Reserve Tranche Position with the IMF, held by a country's central bank (RBI in India).
- Components of India's Forex Reserves:
- Foreign Currency Assets (FCA): The largest component of India's reserves; held in major currencies (e.g., US Dollar, Euro, Japanese Yen, Pound Sterling). Most of India's total reserves are held in the form of foreign currency.
- Gold Reserves: Physical gold held by the Reserve Bank of India (RBI). India's rank in terms of gold reserves is typically around 9th globally (as per World Gold Council data, subject to dynamic changes).
- Special Drawing Rights (SDRs):
- An international reserve asset created by the International Monetary Fund (IMF).
- Often referred to as an 'artificial currency' or 'paper gold'.
- It exists solely as a book-keeping entry (not paper currency, gold, or silver).
- Its value is based on a basket of five major international currencies: US Dollar, Euro, Chinese Renminbi (added in October 2016), Japanese Yen, and British Pound.
- SDRs aim to supplement official reserves of member countries, thereby addressing the problem of international liquidity (related to the non-availability of dollars and other hard currencies).
- Reserve Tranche Position (RTP) / Gold Tranche:
- Refers to a portion of a member country's quota in the IMF that can be drawn without conditions.
- Represents the difference between a country's quota and the IMF's holdings of its currency.
- This is a credit system granted by the IMF to its members.
- Custody of India's Forex Reserves: The Foreign Exchange Reserves of India are kept in the custody of the Reserve Bank of India (RBI).
- Cost of Holding Reserves: Holding foreign currency as reserves incurs an opportunity cost (the return that could have been earned by investing these funds elsewhere) and exposure to exchange rate fluctuations. Thus, there is a cost associated with holding foreign currency as reserves.
- International Liquidity: Refers to the availability of widely accepted international means of payment. The problem of international liquidity is related to the non-availability of dollars and other hard currencies.
- Import Cover: Describes the number of months of imports that a country's international reserves could finance. It is calculated as the ratio of total forex reserves to average monthly imports.
- General Share Order in India's Forex Reserves (Descending): Foreign Currency Assets (FCA) > Gold Reserves > Special Drawing Rights (SDRs) > Reserve Tranche Position (RTP). (This order is generally consistent, though specific proportions can fluctuate).
- Illustrative/Exam-Specific Value for India's Forex Reserves: India's foreign exchange reserves were approximately USD 640.3 Billion towards the end of December 2024 (value typically referenced in MCQ scenarios; actual figures are dynamic).
- Items NOT included in Official Forex Reserves: Foreign credits not yet received, loans from foreign countries, loans from the World Bank, and foreign assets held by Indian individuals or businesses are not components of official foreign exchange reserves.
Convertibility
- Convertibility Ability to exchange domestic currency for foreign currency and vice versa, without restrictions, for international transactions.
Current Account Convertibility (CAC)
Freedom to convert domestic currency into foreign currency (and vice versa) for all legitimate current account transactions (e.g., trade, services, remittances, interest/dividend payments).
- India achieved
full Current Account Convertibility in August 1994.
- Foreign Exchange Management Act (FEMA), 1999 replaced FERA, 1973.
- FEMA, 1999 aims at facilitating external trade and payments and promoting the orderly development and maintenance of the foreign exchange market in India.
- Capital Account Convertibility (CAC) Freedom to convert domestic currency into foreign currency (and vice versa) for all capital account transactions (e.g., investments, loans, cross-border purchase/sale of assets).
- India currently has
partial (or limited) Capital Account Convertibility, meaning certain restrictions apply to capital flows.
certain
restrictions apply to capital flows.
- Tarapore Committee (1997) Recommended a phased approach to full CAC, outlining preconditions.
Second Tarapore Committee (2006)
Re-examined the roadmap for full CAC, reaffirming the need for preconditions.
Prerequisites for full CAC (as per Tarapore Committees)
Sound fiscal policy (reduced fiscal deficit), low inflation, robust financial sector (strong banks, effective regulation), adequate foreign exchange reserves.
Definition and Significance of Balance of Payments (BoP)
- Balance of Payments (BoP):
- Systematic record of all economic transactions between residents of a country and the rest of the world over a specific period (normally a year).
- Includes all import and export transactions (goods, services, income, transfers) and capital movements.
- Comprises:
- Current Account: Records transactions related to goods, services, income (e.g., remittances, interest, dividends), and unilateral transfers.
- Capital Account: Records transactions related to financial assets and liabilities (e.g., foreign investments, loans, banking capital).
- BoP, in an accounting sense, always balances. A deficit/surplus typically refers to the current account or the combined current and capital accounts excluding official reserves.
- Significance: Indicates a country's economic relations, external financial health, and informs policy decisions.
- International Monetary Fund (IMF):
- Established: 1945, resulting from 1944 Bretton Woods Conference (a "Bretton Woods Twin" with World Bank).
- Headquarters: Washington D.C.
- Mandate: Promote international monetary cooperation, exchange stability, facilitate balanced growth of international trade, eliminate foreign exchange restrictions, provide shortterm/medium-term financial assistance for Balance of Payments (BoP) problems.
- Loan Eligibility: Grants loans *only to member countries*. Not for long-term project loans.
- Quota & Voting: Quota determines financial contribution, voting power, and access to finance. China has emerged as a significant member post-2019 but not the largest in quota/vote share.
- India's Status: Founding member (1947). Special Drawing Rights (SDR) percentage: ~2.75%, Vote percentage: ~2.63%.
- Reports: Prepares 'Global Financial Stability Report'.
- IMFC (International Monetary and Financial Committee): Advises IMF Board of Governors on global economy, mirrors Executive Board, operates by consensus. World Bank participates as an observer.
- Triffin Dilemma: The conflict between short-term domestic objectives and long-term international objectives when a national currency serves as the international reserve currency.
- World Bank Group:
- Established: 1945, resulting from 1944 Bretton Woods Conference (a "Bretton Woods Twin" with IMF).
- Headquarters: Washington D.C.
- Purpose: Provide financial and technical assistance to developing countries for development projects and poverty reduction.
- Constituent Institutions (5):
- IBRD (International Bank for Reconstruction and Development): Provides loans to middle-income and creditworthy low-income countries.
- IDA (International Development Association): Provides "soft loans" (low or no interest, long repayment) to the poorest developing countries.
- IFC (International Finance Corporation): Promotes private sector development in developing countries.
- MIGA (Multilateral Investment Guarantee Agency): Offers political risk insurance and credit enhancement.
- ICSID (International Centre for Settlement of Investment Disputes): Resolves investment disputes between investors and host countries.
- Not part of World Bank Group: Investment Policy Framework for Sustainable Development (IPFSD) (framework by UNCTAD).
- Role: Acted as a third party in the Indo-Pak River Water Agreement.
- India's Debt: Classified by World Bank (e.g., as a moderately indebted country).
- World Trade Organization (WTO):
- Purpose: The only global international organization dealing with the rules of trade between nations.
- Establishment: Officially commenced operations on 1 January 1995, under the Marrakesh Agreement, concluding the Uruguay Round negotiations.
- Predecessor: General Agreement on Tariffs and Trade (GATT), which ceased to exist upon WTO's formation.
- Headquarters: Geneva.
- Membership: India is a founder member. A WTO member must be a customs territory with full autonomy in external commercial relations.
- Voting Rights: Does not follow voting rights according to monetary share; decisions are primarily by consensus, otherwise one country, one vote.
- Key Agreements (from Uruguay Round):
- General Agreement on Trade in Services (GATS)
- Trade-Related Aspects of Intellectual Property Rights (TRIPS)
- Trade-Related Investment Measures (TRIMS)
- General Agreement on Tariffs and Trade (GATT 1994)
- Not covered by Uruguay Round: General Agreement on Environment Protection.
- TRIPS: Binding on all WTO members. LDC members have transition periods (e.g., 20 years from general application date for certain provisions) before full application.
- Other International Economic Organizations & Concepts:
- Asian Development Bank (ADB): International agency providing soft loans/development assistance to developing countries in Asia. Japan holds a significant share. HQ: Manila.
- New Development Bank (NDB): Established by BRICS nations (Brazil, Russia, India, China, South Africa) in 2014, commenced 2015. Headquarters: Shanghai. Bangladesh is not a founding member.
- Double Taxation Avoidance Agreement (DTAA): Prevents taxpayers residing in one country and earning income in another from being taxed twice on the same income. India has DTAAs with more than 80 countries.
- Trade Blocks:
- SAPTA (South Asian Preferential Trade Agreement)
- EFTA (European Free Trade Association)
- OPEC (Organization of the Petroleum Exporting Countries): *Not a trade block*, but an intergovernmental organization coordinating petroleum policies.
- G20: Forum of 20 major economies (countries mentioned in MCQ 28: Argentina, Mexico, South Africa, Turkey are all members; Australia, Canada, Brazil, Saudi Arabia, Indonesia, Japan, South Korea are also members).
- G20 Common Framework: Initiative by G20 and Paris Club to support Low Income Countries with unsustainable debt.
- WIPO (World Intellectual Property Organization): A specialized agency of the United Nations System of Organizations. Headquarters: Geneva (not Rome). TRIPS agreement refers to WIPO conventions.
Impact of Global Economic Developments on India's BoP
- The First BRIC Summit was held in Yekaterinburg, Russia, in 2009.
- South Africa joined the BRIC grouping in 2010, leading to its renaming as BRICS. It was the last of the original five members to join.
- The 'Fortaleza Declaration' was issued at the 6th BRICS Summit held in Fortaleza, Brazil, in 2014.
- A key outcome of the Fortaleza Summit (2014) was the establishment of the New Development Bank (NDB).
India's BoP Trends: Current Account Deficit (CAD) and Capital Account Surplus (CAS)
- Balance of Payments (BoP): Records all economic transactions between residents of a country and the rest of the world.
- Components of BoP: Current Account and Capital Account.
- Current Account: Records trade in goods (visibles), services (invisibles), income, and current transfers.
- India's Current Account Trend:
- Merchandise Trade Balance: India almost consistently runs a merchandise trade deficit (value of goods imports > exports).
- Net Invisibles: India almost consistently records a net surplus in invisibles (e.g., software exports, remittances from abroad). This surplus partially offsets the merchandise trade deficit.
- Current Account Deficit (CAD): India generally runs a CAD, as the merchandise trade deficit typically outweighs the net invisibles surplus.
- Capital Account: Records international capital transfers, investments (FDI, FII), external borrowings (ECBs), and banking capital.
- India's Capital Account Trend:
- Capital Account Surplus (CAS): India typically runs a CAS, meaning net capital inflows (inflows > outflows).
- Financing CAD: The CAS is crucial for financing India's persistent CAD, ensuring overall BoP stability.
- A negative capital account balance (net capital outflow) is an infrequent and generally unsustainable scenario for India, indicating significant economic stress or capital flight.
- Overall BoP: BoP must balance. Any surplus/deficit in current & capital accounts is reflected in changes in foreign exchange reserves.
Management of Capital Flows and Foreign Exchange Reserves
- RBI's Foreign Exchange Reserves (FER) components: Foreign Currency Assets (FCA), Gold, Special Drawing Rights (SDR), and Reserve Tranche Position.
- Adequacy of FER is assessed using: Reserves to import ratio, Reserves to external debt ratio, Reserves to GDP ratio, and Reserves to monetary aggregates.
- FY 2018-19: Total foreign exchange reserves were approximately ₹34,55,882 crores.
- End-November 2021: India was 4th largest FER holder globally (after China, Japan, Switzerland).
- Dec 31, 2021: India's FER stood at US $634 billion, providing 13.2 months of import cover.
- Guidotti Rule: Associated with reserve management.
- SLF-MF: Special Liquidity Facility for Mutual Funds.
Tight Monetary Policy
Increases interest rates, attracting capital inflows (improves capital account), and reduces aggregate demand, curbing imports.
Credit Control
Restricts domestic credit availability for import financing.
Contractionary Fiscal Policy
Reduces government expenditure or increases taxes, decreasing aggregate demand and subsequently lowering import demand.
Devaluation (Fixed Exchange Rate System) / Depreciation (Flexible Exchange Rate System)
A deliberate or market-driven decrease in the value of domestic currency relative to foreign currencies.
- Effects
of
Devaluation/
Depreciation
- Makes exports cheaper for foreign buyers, thereby increasing export demand.
- Makes imports more expensive for domestic buyers, thereby decreasing import demand.
- Aims to improve the trade balance (Current Account deficit).
- Revaluation (Fixed ER) /
Appreciation (Flexible ER) An increase in the value of domestic currency; used to correct BoP surplus (makes exports more expensive, imports cheaper).
Managed Float
Central bank intervenes in foreign exchange markets to influence the exchange rate without a fixed peg.
Tariffs
Taxes imposed on imported goods, increasing their price and reducing demand.
Quotas
Quantitative limits on the volume or value of specific imported goods.
Import Substitution
Promoting domestic production of goods previously imported to reduce reliance on foreign goods.
Attracting FDI/FPI
Encouraging Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) to boost capital inflows and improve the Capital Account.
External Borrowing
Obtaining loans from international institutions or foreign countries as a temporary measure to finance deficits.
Practice MCQs: Balance of Payments (BoP)
Components of BoP: Capital Account (FDI, FII, External Borrowings, NRI Deposits)
An Indian businessperson buys shares in a British car company. This transaction will be reflected in :
Asked in: UPSC CAPF 2023
- Balance of Trade, but not in Balance of Pay‐ ments.
- Balance of Payments, but not in Balance of Trade.
- both Balance of Payments and Balance of Trade.
- neither Balance of Payments nor Balance of Trade.
Show answer
Answer: B. Balance of Payments, but not in Balance of Trade.
- Balance of Payments (BOP) records all international economic transactions, including financial ones. - Balance of Trade (BOT) primarily records international trade in goods. - Buying foreign shares is a financial investment, recorded in the Capital/ Financial Account of the BOP.
Consider the following statements : 1. Most of India's external debt is owed by governmental entities. 2. All of India's external debt is denominated in US dollars. Which of the statements given above is/are correct?
Asked in: UPSC IAS 2019
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Show answer
Answer: D. Neither 1 nor 2
Statement 1 is incorrect. India's external debt is owed by various sectors, including sovereign (government) and non-sovereign entities (such as corporate sector, banks, and NRI depositors). Data from the Reserve Bank of India (RBI) consistently shows that non-sovereign debt constitutes a larger portion of India's total external debt than sovereign debt. For instance, non-sovereign debt often accounts for over three-fourths of the total external debt.Statement 2 is incorrect. India's external debt is denominated in multiple currencies. While the US dollar is the dominant currency, a significant portion is also denominated in Indian Rupees (e.g., Rupee Denominated Bonds held by non-residents), SDRs, Japanese Yen, Euro, and other currencies. Therefore, not all of India's external debt is denominated in US dollars.
Which country has signed an agreement on Civil nuclear cooperation with India in sept. 2008:
Asked in: RPSC RAS Prelims 2008
- Australia
- Japan
- Brazil
- France
Show answer
Answer: D. France
India signed a civil nuclear cooperation agreement with France in September 2008. This was a significant step in expanding India's nuclear energy program after the Nuclear Suppliers Group (NSG) granted India a waiver to resume nuclear trade.
After the US Dollar-denominated debt, which of the following currency-denominated debt is the second largest component in India's external debt at the end of December 2021?
Asked in: Civil Judge 2022
- SDR
- Indian Rupee
- Yen
- Euro
Show answer
Answer: D. Euro
Euro-denominated debt is the second largest component of India's external debt after US Dollar- denominated debt as of December 2021.
Components of BoP: Current Account (Goods, Services, Income, Transfers)
Which is correct about the opening of Non Resident External account in India? 1. NRE accounts can be opened by NRIs and OCBs (Overseas Corporate Bodies) with authorized dealers and banks in all the forms of demand and term deposits. 2. Deposits in this account are allowed in any currency.
Asked in: GPSC Prelims CSP 2 2019
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Show answer
Answer: D. Neither 1 nor 2
- Statement 1 is incorrect: NRE accounts can be opened by Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs). Overseas Corporate Bodies (OCBs) were permitted to open NRE accounts previously, but this facility was withdrawn by the Reserve Bank of India (RBI) in 2003. - Statement 2 is incorrect: Deposits into NRE accounts originate from funds remitted from outside India in freely convertible foreign currency or from balances in existing NRE/FCNR(B) accounts. However, the NRE account itself is maintained in Indian Rupees (INR). While the source of funds for deposit must be foreign currency (or balances in other NRE/FCNR accounts), the account balance is held and transactions are denominated in INR. The statement "Deposits in this account are allowed in any currency" is misleading as the account does not hold foreign currency balances; the funds are converted to INR upon deposit.
Which of the following statements are correct regarding World Bank's Remittance Prices Worldwide database? 1. According to the report India became the world's largest recipient of remittances by receiving 87 billion dollars in 2021 2. The USA is the biggest source accounting for 20% of these funds 3. India is followed by China, Mexico, Philippines and Egypt
Asked in: GPSC Prelims CSP 2 2022
- 1, 2 and 3
- 2 and 3 only
- 1 and 2 only
- 1 and 3 only
Show answer
Answer: C. 1 and 2 only
According to the World Bank's Migration and Development Briefs and Remittance Prices Worldwide database updates in 2021, India continued to be the world's top recipient of remittances, with flows projected to reach $87 billion in 2021. The United States remained the largest source country for remittances globally, including for India. In 2021, the ranking of top recipient countries after India was Mexico, followed by China, then the Philippines, and Egypt.
Which of the following statements are correct in respect of ‘Agreement on use of Local Currencies for cross-border transactions’? (1) India and UAE have signed a memorandum in this Agreement. (2) This agreement enables a frame work for trade settlements in their respective national currencies. (3) This Agreement was signed by the Prime Ministers of India and UAE (4) Peekay Intermark Ltd. and Reserve Bank of India were the first users of this system
Asked in: OPSC CS Prelims 2022
- 2 and 4
- 3 and 4
- 1 and 2
- 1 and 3
Show answer
Answer: C. 1 and 2
India and UAE have agreed to promote the use of their respective local currencies (INR and AED) for cross-border transactions, enhancing trade and economic ties.
The terms 'Agreement on Agriculture', 'Agreement on the Application of Sanitary and Phytosanitary Measures' and 'Peace Clause' appear in the news frequently in the context of the affairs of the
Asked in: UPSC IAS 2015
- Food and Agriculture Organization
- United Nations Framework Conference on Climate Change
- World Trade Organization
- United Nations Environment Programme
Show answer
Answer: C. World Trade Organization
- The World Trade Organization (WTO) is the global international organization dealing with the rules of trade between nations. - The 'Agreement on Agriculture' (AoA) is a WTO agreement that came into effect in 1995, dealing with domestic support, market access, and export subsidies in agriculture. - The 'Agreement on the Application of Sanitary and Phytosanitary Measures' (SPS Agreement) is another WTO agreement concerning the application of food safety and animal and plant health regulations in international trade. - The 'Peace Clause' was a temporary provision within the AoA that restrained countries from challenging, through WTO dispute settlement, certain subsidies that other member states provide to their farmers, provided the subsidies comply with certain conditions.
Consider the following statements : 1. India is a member of the International Grains Council. 2. A country needs to be a member of the International Grains Council for exporting or importing rice and wheat. Which of the statements given above is/are correct ?
Asked in: UPSC IAS 2024
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Show answer
Answer: A. 1 only
Statement 1 is correct. India is a member country of the International Grains Council (IGC), an intergovernmental organization that seeks to promote international co-operation in grain trade and collects market information. Statement 2 is incorrect. Membership in the International Grains Council is not a mandatory requirement for a country to export or import rice and wheat. Countries engage in international trade of these commodities based on bilateral agreements, WTO regulations, and other trade arrangements, irrespective of IGC membership.
Term ‘Balance of Payment’ is used in relation to which of the following?
Asked in: UPPSC Upper Mains 2012
- Annual sale of a factory
- Tax collection
- Exports & Imports
- None of the above
Show answer
Answer: C. Exports & Imports
The term 'Balance of Payment' (BoP) refers to a systematic record of all economic transactions between residents of a country and the rest of the world during a specific period, typically a year. It includes transactions related to trade in goods (exports and imports), services, income, and capital flows.
The Government of India has replaced FERA by
Asked in: UPPSC Upper Mains 2007
- 1he Competition Act
- The FEMA
- The Monopolies Act
- The MRTP Act
Show answer
Answer: B. The FEMA
- FERA was characterized by strict regulations and criminal penalties for violations. - FEMA is a more liberal law, classifying transactions into 'capital account' and 'current account' and facilitating external trade and payments. - FEMA treats violations as civil offenses, unlike FERA.
The World Bank has recently sanctioned e loan of 944 million dollars to India, for which of the following sectors, the loan is not meant for ?
Asked in: UPPSC Upper Mains 2007
- Rural finance system
- Vocational Training Programmes
- Community-based water management projects
- Rural roads and sanitation
Show answer
Answer: B. Vocational Training Programmes
World Bank loans are tied to specific projects or policy reform programs. While the World Bank supports a wide range of development sectors in India, the components of any given loan are defined by the agreement for that particular project/program.
In the year 2001, India offered a grant of five million dollars to Tajikistan to
Asked in: UPPCS Prelims 2002
- tackle the drought situation
- set up a software Technology Park
- promote mineral exploration
- procure defence equipment
Show answer
Answer: A. tackle the drought situation
Tajikistan faced a severe drought and food crisis in 2000-2001. India provided significant humanitarian assistance, including food grains, medicines, and financial aid, to help the country cope with the situation. While cooperation in other areas like IT was also discussed, the specific grant of five million dollars was largely directed towards humanitarian relief efforts prompted by the drought.
Consider the following statements: Most international agencies which fund development programmes in India on intergovernmental bilateral agreements, mainly provide I. Technical assistance. II. Soft loans which are required to be paid back with interest. III. Grants, not required to be paid back. IV. Food assistance to alleviate poverty. Of these statements
Asked in: UPPCS Prelims 1996
- II and IV and correct
- I, II and III are correct
- I, II and IV are correct
- III and IV are correct
Show answer
Answer: B. I, II and III are correct
Development assistance from international agencies typically includes financial aid (loans and grants) and technical expertise. The terms of financial aid, especially for development, are often 'soft' or concessional.
Which country has highest loan from world bank after India:
Asked in: RPSC RAS Prelims 2010
- South Africa
- Brazil
- Iran
- Maxico
Show answer
Answer: B. Brazil
India has consistently been one of the largest borrowers from the World Bank group. Following India, countries like Brazil, Indonesia, China (historically a large borrower, though less so recently), and others have held the position of the second or third largest borrower, depending on the specific year and World Bank reports. Brazil is a strong candidate among the given options.
Components of BoP: Financial Account (Official Reserve Account)
Which of the following statements is/are correct? Most of India's reserves is held in the form of foreign currency. There is no cost of holding foreign currency as reserves by a nation. Select the correct answer using the code given below.
Asked in: UPSC CDS 1 2024
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Show answer
Answer: A. 1 only
- Statement 1 is correct. India's foreign exchange reserves are composed of Foreign Currency Assets (FCA), Gold, Special Drawing Rights (SDRs), and Reserve Tranche Position (RTP) in the IMF. Foreign Currency Assets, held in major currencies, consistently form the largest component, typically accounting for over 90% of the total reserves. - Statement 2 is incorrect. Holding foreign currency reserves incurs costs. These include the opportunity cost (the return that could have been earned if the funds were invested domestically or in higher-yield assets instead of low-yield reserves), potential losses due to exchange rate fluctuations (if the reserve currency depreciates), and administrative costs of managing the reserves.
Which of the following is/are treated as artificial currency?
Asked in: HPPSC HPAS Prelims 2014
- ADR
- SDR
- GDR
- Both ADR and GDR
Show answer
Answer: B. SDR
SDRs are not a currency in the traditional sense, as they are not held by the public or used for transactions in the same way as physical currencies. However, they function as a unit of account for the IMF and some other international organizations and represent a potential claim on the freely usable currencies of IMF members. They are sometimes referred to as "paper gold" or "artificial currency" due to their role as a reserve asset.
Which of the following terms are components of forex reserves? 1. Foreign Currency Assets 2. Gold 3. Special Drawing Rights 4. The Reserve in the Internatior Monetary Fund
Asked in: OPSC CS Prelims 2022
- 1, 2 and 3
- 1, 2 and 4
- 2, 3 and 4
- 1, 2, 3 and 4
Show answer
Answer: D. 1, 2, 3 and 4
- 1. Foreign Currency Assets (FCA): This is the largest component, consisting of foreign currencies held as deposits, bonds, and securities. - 2. Gold: The RBI holds a portion of reserves in the form of gold. - 3. Special Drawing Rights (SDRs): These are international reserve assets created by the IMF and allocated to its members. They can be exchanged for freely usable currencies. - 4. The Reserve in the International Monetary Fund: This refers to India's Reserve Tranche Position (RTP) in the IMF, which is essentially a part of its quota that it can draw upon freely.
Which one of the following groups of items is included in India's foreign-exchange reserves?
Asked in: UPSC IAS 2013
- Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries
- Foreign-currency assets, gold holdings of the RBI and SDRs
- Foreign-currency assets, loans from the World Bank and SDRs
- Foreign-currency assets, gold holdings of the RBI and loans the World Bank
Show answer
Answer: B. Foreign-currency assets, gold holdings of the RBI and SDRs
Foreign exchange reserves are assets held by a central bank in foreign currencies, used to back liabilities and influence monetary policy. The major components of India's foreign exchange reserves are FCAs (investments in foreign government securities, deposits in foreign central banks/BIS), Gold, SDRs (an international reserve asset created by the IMF), and the Reserve Position in the IMF (India's share in the IMF quota).
The problem of international liquidity is related to the non-availability of
Asked in: UPSC IAS 2015
- goods and services
- gold and silver
- dollars and other hard currencies
- exportable surplus
Show answer
Answer: C. dollars and other hard currencies
International liquidity refers to the availability of financial assets that can be readily used to settle international transactions, primarily reserves of convertible foreign currencies (hard currencies), gold, and drawing rights with international institutions like the IMF (SDRs).
Recently, which one of the following currencies has been proposed to be added to the basket of IMF's SDR?
Asked in: UPSC IAS 2016
- Rouble
- Rand
- Indian Rupee
- Renminbi
Show answer
Answer: D. Renminbi
- The SDR is an international reserve asset created by the IMF to supplement the official reserves of member countries. - The value of the SDR is based on a basket of key international currencies. Prior to 2016, the basket consisted of the US dollar, Euro, Japanese Yen, and British Pound. - In 2015, the IMF's Executive Board decided to include the Chinese Renminbi (RMB) in the SDR basket, effective October 1, 2016.
Which of the following best describes the term 'import cover', sometimes seen in the news?
Asked in: UPSC IAS 2016
- It is the ratio of value of imports to the Gross Domestic Product of a country
- It is the total value of imports of a country in a year
- It is the ratio between the value of exports and that of imports between two countries
- It is the number of months of imports that could be paid for by a country's international re‐ serves
Show answer
Answer: D. It is the number of months of imports that could be paid for by a country's international re‐ serves
- Import cover is calculated as the total value of international reserves divided by the average monthly value of imports. - It indicates how many months a country can continue to pay for imports if its sources of foreign exchange earnings (like exports, remittances, capital inflows) were to cease. - A higher import cover indicates a stronger external position and greater resilience to external shocks. A common benchmark is 3-4 months of import cover, considered adequate by many international financial institutions.
"Gold Tranche" (Reserve Tranche) refers to
Asked in: UPSC IAS 2020
- a loan system of the World Bank
- one of the operations of a Central Bank
- a credit system granted by WTO to its mem‐ bers
- a credit system granted by IMF to its members
Show answer
Answer: D. a credit system granted by IMF to its members
- Gold Tranche or Reserve Tranche is associated with the IMF. - It represents an unconditional drawing right for member countries. - It is part of a country's quota contribution to the IMF.
Special Drawing Rights is the currency of International Monetary Fund. This is in the form of
Asked in: APPSC Group II Mains paper 2 2025
- Paper currency
- Gold
- Silver and gold both
- Book keeping entry only
Show answer
Answer: D. Book keeping entry only
The Special Drawing Right (SDR) is an international reserve asset created by the International Monetary Fund (IMF) to supplement its member countries' official reserves. It is not a currency itself, nor is it a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs are held by countries as part of their foreign exchange reserves and are accounted for as bookkeeping entries; there is no physical form (paper currency, gold, or silver).
Which of the following are included in the Reserve Bank of India's Foreign Exchange Reserves (FER) ? a. Foreign Currency Assets (FCA) b. Gold c. Special Drawing Rights (SDR) d. Reserve Tranche Position
Asked in: APPSC Group II Mains paper 2 2025
- a and b only
- b, c and d only
- a, b and c only
- All the above
Show answer
Answer: D. All the above
All the components listed - Foreign Currency Assets, Gold, Special Drawing Rights, and Reserve Tranche Position - are standard components of a country's official foreign exchange reserves, as reported by central banks like the RBI.
All of the following are international reserves except
Asked in: WBCS Main Paper 5 2022
- SDRs
- Gold
- Foreign credits not yet received
- Foreign Currency Assets
Show answer
Answer: C. Foreign credits not yet received
International reserves are assets held by a country's central bank or monetary authority that can be readily used to meet balance of payments needs, intervene in foreign exchange markets, and maintain confidence in the stability of the national currency and economy. Standard components of international reserves include foreign currency assets (holdings of other countries' currencies), gold, Special Drawing Rights (SDRs - a type of international reserve asset created by the IMF), and the Reserve Position in the IMF. Foreign credits that have been agreed upon but not yet received are future inflows, not current assets held by the monetary authority.
Current Account Convertibility (CAC) and Capital Account Convertibility (CAC)
What does FEMA, 1999 aim at?
Asked in: MPSC CS Prelims 2012
- Prohibiting Foreign Tourists
- Controlling imports
- Prohibiting NRI investment
- Facilitating external trade and payment
Show answer
Answer: D. Facilitating external trade and payment
FEMA replaced the more restrictive Foreign Exchange Regulation Act (FERA), 1973. FERA was aimed at conserving foreign exchange. FEMA, in contrast, reflects a liberalized approach, focusing on managing rather than strictly controlling foreign exchange, thereby facilitating international transactions.
Definition and Significance of Balance of Payments (BoP)
Which international agency is the provider of soft loans to developing countries of Asia?
Asked in: APSC CCE Prelims Exam 2006
- International Monetary Fund
- Asian Development Bank
- World Bank
- International Development Association
Show answer
Answer: B. Asian Development Bank
The Asian Development Bank (ADB) is a regional development bank whose mission is to promote social and economic development in Asia and the Pacific. It provides loans, grants, and technical assistance to its member countries, including concessional financing ("soft loans") through its Asian Development Fund (ADF) window to its poorest and most vulnerable developing members. The International Development Association (IDA) is part of the World Bank Group and provides soft loans but to the poorest countries worldwide, not specifically or exclusively focused on Asia, although many Asian countries are recipients. The IMF focuses on macroeconomic stability and balance of payments.
In which year, Kushal Konwar was hanged by the British and for what cause?
Asked in: APSC CCE Prelims Exam 2014
- 1930, spearheading Quit India Movement in Upper Assam
- 1921, facilitating Non-Cooperation Movement and Satyagraha in Sivsagar
- 1942, declared guilty of conspiracy for a train derailment near Golaghat.
- None of the above
Show answer
Answer: C. 1942, declared guilty of conspiracy for a train derailment near Golaghat.
- Kushal Konwar was associated with the Quit India Movement (1942). - He was convicted in connection with the 1942 train derailment near Golaghat. - He was hanged on June 15, 1943.
The High Altitude Warfare School of the Indian Army is located at
Asked in: APSC CCE Prelims Exam 2016
- Siachen
- Manali
- Gulmarg
- Leh
Show answer
Answer: C. Gulmarg
- HAWS is a training establishment that trains Indian Army personnel in mountain and winter warfare. - It conducts specialized courses covering survival, movement, and combat techniques in high altitude and snow-bound areas.
Regarding the composition of the Legislative Council, all following statements are correct, except (1) 1/3rd of the total number of Council shall be elected from local bodies. (2) 1/12th of the total number of Council shall be elected by graduates. (3) 1/12th of the total number of Council shall be elected by Teachers. (4) 1/13th of the total number of Council shall be elected by Legislative Assembly.
Asked in: APSC CCE Prelims Exam 2018
- (1)
- (2)
- (3)
- (4)
Show answer
Answer: D. (4)
- The Legislative Council's composition is specified in Article 171. - Members are drawn from various categories: local bodies, graduates, teachers, members of the legislative assembly, and nominated by the Governor. - Specific fractions of the total strength are allocated to each category.
What is the maturity period of treasury bills issued by Government of India ?
Asked in: APSC CCE Prelims Exam 2018
- 14 and 91 days
- 91 and 182 days
- 91, 182 and 364 days
- 14 and 182 days
Show answer
Answer: C. 91, 182 and 364 days
At present, Treasury Bills are issued in India in three standard tenors: 91 days, 182 days, and 364 days. They are issued through auctions conducted by the Reserve Bank of India.
President of India exercises his powers
Asked in: BPSC Prelims Exam 60 62rd
- either directly or through officers subordinate to him.
- through Ministers
- through Prime Minister
- through Cabinet
Show answer
Answer: A. either directly or through officers subordinate to him.
The President's power exercise is constitutionally defined to be either direct or through subordinate officers.
The Iran-Pakistan gas pipeline is also called as
Asked in: BPSC Prelims Exam 60 62rd
- Friendship pipeline
- Future pipeline
- Peace pipeline
- Unity pipeline
Show answer
Answer: C. Peace pipeline
- The Iran–Pakistan gas pipeline is an under-construction long-term project to construct a natural gas pipeline from Iran to Pakistan. - It was originally planned to extend to India, in which case it was sometimes referred to as the "Iran–Pakistan–India Pipeline" or "IPI Pipeline". - It gained the popular name "Peace pipeline" due to the potential for regional cooperation and stability it could foster.
Which of the following teams has won the Newton-Bhabha Fund for the project on Groundwater Arsenic Research in Ganga River Basin?
Asked in: BPSC Prelims Exam 63rd
- India-Russia Joint Team
- India-UK Joint Team
- India-Japan Joint Team
- India-Israel Joint Team
Show answer
Answer: B. India-UK Joint Team
- The Newton-Bhabha Fund is a bilateral program between the UK and India. - Research projects under this fund are collaborative efforts involving scientists and institutions from both nations.
What are the special drawing rights percentage and vote percentage respectively of India in International Monetary Fund (IMF)? Ans: A As of the 15th General Review of Quotas, India's quota in the IMF is SDR 13,114.4 million, which represents 2.75% of the total quotas. India's total voting power is based on its quota plus basic votes. Calculated as a percentage of total votes, India's voting share is 2.63%. The question asks for SDR percentage (which is based on Quota percentage) and vote percentage respectively. 46. Which one of the following institutions is not in the 'World Bank Group' ?
Asked in: CGPSC Prelims Exam 2021 · UPSC Geoscientist 2024
- International Centre for Settlement of Investment Disputes (ICSID)
- Multilateral Investment Guarantee Agency (MIGA)
- Investment Policy Framework for Sustainable Development (IPFSD)
- International Finance Corporation (IFC)
Show answer
Answer: C. Investment Policy Framework for Sustainable Development (IPFSD)
- World Bank Group members: IBRD, IDA, IFC, MIGA, ICSID. - IBRD & IDA together are often referred to as "the World Bank", providing financing to governments. - IFC finances private sector development. - MIGA provides political risk insurance and credit enhancement. - ICSID resolves international investment disputes. - IPFSD is a framework, not an institution.
Which one of the following pact involves the world bank as a third party ?
Asked in: GPSC Prelims CSP 1 2017
- Indo-US Nuclear Deal
- Indo-Sri Lanka Treaty
- Indo-Nepal Trade Pact
- Indo-Pak River water agreement
Show answer
Answer: D. Indo-Pak River water agreement
The Indus Waters Treaty, signed between India and Pakistan in 1960, deals with the distribution of river waters of the Indus River system. The World Bank (then International Bank for Reconstruction and Development - IBRD) played a crucial role in mediating the treaty and is a signatory to the treaty, making it a third party. The treaty also establishes a permanent Indus Commission for dispute resolution, with the World Bank having a specific role in certain arbitration processes.
The cabinet committee on economic affairs, chaired by the Prime Minister has approved investment in Arun-3 Hydro Electric Project in which country ?
Asked in: GPSC Prelims CSP 2 2017
- Bangladesh
- Bhutan
- Nepal
- Maldives
Show answer
Answer: C. Nepal
Arun-3 is a major hydroelectric project located on the Arun River in Sankhuwasabha District of eastern Nepal. India's Satluj Jal Vidyut Nigam (SJVN) is developing this 900 MW project.
Impact of Global Economic Developments on India's BoP
With reference to a grouping of countries known as BRICS, consider the following statements : 1. The First Summit of BRICS was held in Rio de Janeiro in 2009. 2. South Africa was the last to join the BRICS grouping. Which of the statements given above is/are correct?
Asked in: UPSC IAS 2014
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Show answer
Answer: B. 2 only
Statement 1 is incorrect. The first summit of BRIC (Brazil, Russia, India, China) was held in Yekaterinburg, Russia, in 2009. Rio de Janeiro hosted the fourth BRICS summit in 2012. Statement 2 is correct in the context of the original BRICS grouping (Brazil, Russia, India, China, South Africa). South Africa was invited to join in December 2010 and formally became a member on April 14, 2011, attending its first summit in Sanya, China, in 2011. Thus, South Africa was the last to join the BRIC grouping to form BRICS-5.
The 'Fortaleza Declaration', recently in the news, is related to the affairs of
Asked in: UPSC IAS 2015
- ASEAN
- BRICS
- OECD
- WTO
Show answer
Answer: B. BRICS
The Fortaleza Declaration was the outcome document of the 6th BRICS summit held in Fortaleza, Brazil, in July 2014. A key achievement of this summit, as articulated in the Declaration, was the decision to establish the New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA).
India's BoP Trends: Current Account Deficit (CAD) and Capital Account Surplus (CAS)
Which one of the following is not correct in the context of balance of payments of India during 2013-2014?
Asked in: UPSC NDA 2 2015
- India's exports were less than its imports
- Trade balance was negative
- Net invisibles were positive
- Capital account balance was negative
Show answer
Answer: D. Capital account balance was negative
In 2013-14, India experienced a current account deficit financed by a surplus in the capital account.
Management of Capital Flows and Foreign Exchange Reserves
In the fiscal year 2018-19, the total foreign exchange reserves are
Asked in: BPSC Prelims Exam 65th
- ₹34,55,882 crores
- ₹30,55,882 crores
- ₹32,55,882 crores
- ₹28,55,882 crores
Show answer
Answer: D. ₹28,55,882 crores
Foreign exchange reserves figures fluctuate weekly and monthly, but end-of-fiscal year data provides a specific point of reference.
The Foreign Exchange Reserves (FER) of RBI include which of the following? 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.
Asked in: BPSC Prelims Exam 69th
- Only 1 and 2
- Only 2, 3 and 4
- Only 1, 2 and 3
- All of the above
Show answer
Answer: D. All of the above
- FCA includes the assets held in foreign currencies, typically in the form of deposits, bonds, and treasury bills of other countries. - Gold is valued periodically at market rates. - SDRs are international reserve assets created by the International Monetary Fund (IMF). - RTP represents a member country's share in the IMF from which it can draw foreign exchange.
Adequacy of foreign exchange reserves of a country is captured by which of the following indicators? Reserves to import ratio Reserves to external debt ratio Reserves to GDP ratio Reserves to monetary aggregates Select the correct answer using the code below:
Asked in: UPSC CAPF 2023
- 1 and 3 only
- 1, 2, 3 and 4
- 2, 3 and 4 only
- 1, 2 and 4 only
Show answer
Answer: B. 1, 2, 3 and 4
Adequacy of foreign exchange reserves is a multifaceted concept, evaluated using various ratios that relate reserves to potential drains such as imports, external debt, and domestic money supply.
As of end-November 2021, India was the fourth largest foreign exchange reserves holder in the world after China, Japan and Switzerland. Reserves stand at US $634 billion on 31st December 2021. This is equivalent to
Asked in: WBCS Main Paper 5 2022
- 13.2 months of import cover.
- 12.1 months of import cover.
- 9 months of import cover.
- 5 months of import cover.
Show answer
Answer: A. 13.2 months of import cover.
Import cover is a measure of how many months of imports can be paid for by a country's foreign exchange reserves. It is calculated by dividing the total foreign exchange reserves by the average monthly value of imports. According to official data, India's foreign exchange reserves stood at approximately US $634 billion at the end of December 2021, providing an import cover equivalent to 13.2 months based on the projected imports for the fiscal year 2021-22.
Guidotti Rule is associated with
Asked in: WBCS Main Paper 5 2022
- reserve management
- exchange rate management
- inflation management
- stagflation management
Show answer
Answer: A. reserve management
Guidotti Rule provides a benchmark for the adequacy of a country's foreign exchange reserves.
Measures to Correct BoP Disequilibrium (Monetary, Fiscal, Exchange Rate, Trade Policies)
Assertion (A): Devaluation will lead to improvement in balance of trade. Reason (R) : Devaluation will lead to increase in price of exports.
Asked in: APPSC Group II Mains paper 2 2025 · UPPCS Prelims 2011 · UPPSC Upper Mains 2007
- Both (A) and (R) are true and (R) is the correct explanation of (A)
- Both (A) and (R) are true and (R) is not the correct explanation of (A)
- (A) is true and (R) is false
- (A) is false and (R) is true
Show answer
Answer: C. (A) is true and (R) is false
Devaluation is a monetary policy tool used to make a country's exports cheaper and imports more expensive in foreign currency terms. In international trade, 'invisibles' refer to services traded across borders, as opposed to 'visibles' which are tangible goods.
Currently India's largest source of external financing happens to be
Asked in: CDPO 2024
- remittances from abroad
- income from tourism
- service exports
- private transfers
Show answer
Answer: C. service exports
Service exports are the most significant source of external financing for India, surpassing remittances, tourism income, and private transfers.