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English · हिन्दी · తెలుగు · தமிழ் · മലയാളം · मराठी · ಕನ್ನಡ

Exchange rates, foreign exchange reserves and foreign capital

తెలుగులో వివరణ

External sector · Part 2 / 2 · Fact-checked on · how we check

Written with AI from the sources listed at the bottom of this page, then fact-checked by a separate AI.

How the exchange rate is set, depreciation and appreciation versus devaluation and revaluation, their effects, fixed, floating and managed regimes and the impossible trinity, India's path from par value and the 1975 basket peg to LERMS (1992) and a unified market rate (1993), rupee trade settlement (2022), NEER and REER, the four components of the foreign exchange reserves and their adequacy, FDI and its 10 per cent threshold, routes, prohibited sectors and Press Note 3, FPI under SEBI, ECBs, NRI deposits and external debt.

Each idea is explained first in Telugu (తెలుగు), ending with the English and Hindi exam terms, followed by the same point in exam English. UPSC Prelims is in English or Hindi, so understand it in Telugu and revise it in English.

మొదటి భాగంలో చెల్లింపుల శేషం అనే పుస్తకంలో ఏమేమి రాస్తారో చూశాం. ఇప్పుడు ఆ లావాదేవీలన్నిటినీ కలిపే 'ధర' — మారకపు రేటు — గురించి. సంతలో కూరగాయల ధర రోజూ మారినట్టే డాలర్ ధర కూడా మారుతుంది; దాన్ని ఏది మారుస్తుంది, మారితే మనకేమవుతుంది అని చూస్తాం. తర్వాత దేశం దాచుకునే విదేశీ మారక నిల్వలు, చివరగా విదేశీ పెట్టుబడుల రకాలు, వాటి నియమాలు. (→ English: exchange rate · हिन्दी: विनिमय दर)

In exam EnglishPart 1 showed what flows into and out of India's balance of payments. This part looks at the price that connects those flows and at the stock of foreign currency that cushions them. It begins with the exchange rate: what moves it, what a rise or fall does to the economy, and the difference between a market movement and an official decision. It then follows how India's exchange rate system changed from a fixed rate to a market-determined one after 1991, and how economists measure the rupee against many currencies at once. Next come the foreign exchange reserves, what they are made of and how much is enough. The second half sorts foreign capital into its main forms and explains the rules for each.

డాలర్ కూడా సంతలో ఒక సరుకే అనుకోండి. దిగుమతిదారులు, విదేశాల్లో చదివే పిల్లల తల్లిదండ్రులు, డబ్బు వెనక్కి తీసుకెళ్లే విదేశీ పెట్టుబడిదారులు డాలర్ 'కొనేవాళ్లు'; ఎగుమతిదారులు, గల్ఫ్ నుంచి డబ్బు పంపేవాళ్లు, ఇక్కడ పెట్టుబడి పెట్టేవాళ్లు 'అమ్మేవాళ్లు'. ఒక డాలర్‌కు 84 రూపాయలు ఉండేది 87 అయితే మన రూపాయి బలహీనపడింది — దీన్నే విలువ క్షీణత అంటారు. 87 నుంచి 84కి వస్తే రూపాయి బలపడింది. (→ English: depreciation (of a currency) · हिन्दी: मूल्यह्रास)

In exam EnglishThe exchange rate is the price of one currency in terms of another, for example the number of rupees needed to buy one US dollar. In a market-based system it is set by the demand for and supply of foreign exchange. Dollars are demanded by importers, by Indians travelling or studying abroad, and by foreign investors taking money out; they are supplied by exporters, by workers sending remittances and by foreign investors bringing money in. When the rate moves from ₹84 to ₹87 per dollar, each dollar buys more rupees, so the rupee has lost value: this is a depreciation (of a currency). A move the other way, from ₹87 to ₹84, is an appreciation of the rupee.

రూపాయి బలహీనపడితే మన బియ్యం, మందులు విదేశీయులకు చౌకగా దొరుకుతాయి — ఎగుమతిదారుకు లాభం. కానీ పెట్రోల్ కోసం కొనే చమురు ఖరీదవుతుంది, ధరలు పెరుగుతాయి; డాలర్లలో అప్పు తీసుకున్న కంపెనీకి భారం పెరుగుతుంది. మాటల తేడా గుర్తుంచుకోండి: మార్కెట్‌లో దానంతట అదే పడిపోతే 'విలువ క్షీణత'; ప్రభుత్వం స్థిర రేటు వ్యవస్థలో కావాలని తగ్గిస్తే 'విలువ తగ్గింపు' — 1966లో, 1991 జూలైలో అలా జరిగింది. (→ English: devaluation · हिन्दी: अवमूल्यन)

In exam EnglishA weaker rupee has mixed effects. Indian goods become cheaper for foreign buyers, which can help exports, while imports cost more in rupees, which can discourage them. Because India imports most of its crude oil, a falling rupee also feeds into fuel prices and so into inflation, and it raises the rupee cost of repaying loans taken in foreign currency. A stronger rupee works the other way: cheaper imports and lower imported inflation, but harder conditions for exporters. Depreciation and appreciation describe changes brought about by the market. A devaluation or a revaluation is a deliberate official decision to lower or raise the value of a currency under a fixed or pegged system. India devalued the rupee in 1966 and in July 1991; since the rate became market-determined, the correct word for a falling rupee is depreciation.

మారకపు రేటుకు మూడు దారులు. స్థిర రేటు — ప్రభుత్వం 'ఇదే ధర' అని ప్రకటించి కాపాడుతుంది, రేషన్ షాపు ధరలాగా. తేలియాడే రేటు — సంతలో లాగా పూర్తిగా మార్కెట్ నిర్ణయిస్తుంది. భారత్ అనుసరించేది నిర్వహిత తేలియాడే మారకపు రేటు — ధర మార్కెట్‌దే, కానీ మరీ ఊగిసలాడితే రిజర్వ్ బ్యాంకు జోక్యం చేసుకుంటుంది. 'అసాధ్య త్రయం' అంటే స్థిర రేటు, డబ్బు స్వేచ్ఛగా వచ్చిపోవడం, స్వతంత్ర ద్రవ్య విధానం — ఈ మూడూ ఒకేసారి కుదరవు; రెండు తీసుకుంటే మూడోది వదులుకోవాలి. (→ English: managed float · हिन्दी: प्रबंधित अस्थिर विनिमय दर)

In exam EnglishCountries choose among three broad exchange rate regimes. Under a fixed rate, the government or central bank sets the value and defends it by buying and selling foreign currency; the gold standard and the Bretton Woods system of 1944, under which currencies had par values against the US dollar and the dollar was linked to gold, were fixed systems, and Bretton Woods broke down in the early 1970s. Under a free float, the market alone sets the rate. Most emerging economies, India included, follow a managed float, in which the market sets the rate but the central bank steps in when movements become disorderly. Behind these choices lies the 'impossible trinity': a country cannot at the same time keep a fixed exchange rate, allow free movement of capital and run an independent monetary policy. It can have any two, but must give up the third.

మన రూపాయి కథ ఇలా సాగింది: మొదట ప్రభుత్వం నిర్ణయించిన స్థిర విలువ, 1966లో విలువ తగ్గింపు; 1975 నుంచి కొన్ని దేశాల కరెన్సీల 'బుట్ట'తో ముడి. 1991 సంక్షోభం తర్వాత 1992లో రెండు ధరల పద్ధతి — సంపాదనలో 60 శాతం మార్కెట్ ధరకు, 40 శాతం ప్రభుత్వ ధరకు. 1993 మార్చి నుంచి ఒకే మార్కెట్ ధర. ఇప్పుడు రిజర్వ్ బ్యాంకు ఒక నిర్దిష్ట మారకపు రేటును కాపాడదు; మరీ కుదుపులు వస్తేనే అడుగుపెడుతుంది — నది ప్రవాహాన్ని ఆపదు, వరద కట్ట మాత్రం వేస్తుంది. 2022 నుంచి విదేశీ వ్యాపారాన్ని రూపాయల్లోనూ లెక్క కట్టవచ్చు. (→ English: exchange rate · हिन्दी: विनिमय दर)

In exam EnglishIndia's own path shows each regime in turn. After independence the rupee had an official par value, and it was devalued in June 1966. After Bretton Woods collapsed, the rupee was linked from September 1975 to a basket of the currencies of India's main trading partners, with the RBI announcing the rate. In March 1992 the Liberalised Exchange Rate Management System (LERMS) brought in a dual rate: 60 per cent of foreign exchange earnings could be converted at the market rate and 40 per cent had to be sold at the official rate for essential imports and government needs. In March 1993 the two rates were unified into a single market-determined rate. Since then the RBI has said that it intervenes to curb excessive volatility, not to defend any particular level. In July 2022 it also allowed exports and imports to be invoiced and settled in rupees.

మనం ఒక్క అమెరికాతోనే కాదు, ఎన్నో దేశాలతో వ్యాపారం చేస్తాం. కాబట్టి రూపాయిని ఒక్కో దేశపు కరెన్సీతో పోల్చి, ఆ దేశంతో మన వ్యాపారం ఎంత ఉందో దాని ప్రకారం సగటు తీస్తారు — అది NEER. ఇప్పుడు అనుకోండి: రూపాయి విలువ మారలేదు, కానీ మన దేశంలో ధరలు బయటికంటే వేగంగా పెరిగాయి. అప్పుడు మన వస్తువులు విదేశీయులకు ఖరీదవుతాయి; దీన్ని చూపేదే వాస్తవ ప్రభావిత మారకపు రేటు. ఇది 100 కంటే బాగా ఎక్కువ ఉంటే మన ఎగుమతులు పోటీలో కాస్త వెనుకబడుతున్నట్టు. (→ English: real effective exchange rate · हिन्दी: वास्तविक प्रभावी विनिमय दर)

In exam EnglishThe rupee-dollar rate tells only part of the story, because India trades with many countries. The nominal effective exchange rate (NEER) is a weighted average of the rupee's exchange rates against a basket of currencies, each weighted by its share in India's trade. The real effective exchange rate (REER) goes one step further and adjusts the NEER for differences in inflation between India and those partners, so it measures how competitive Indian goods really are. The RBI publishes both, in a 6-currency and a 40-currency version, as index numbers against a base year set at 100. Suppose the rupee holds steady against other currencies but Indian prices rise faster than prices abroad: the NEER barely moves, yet the REER rises, meaning Indian goods have become dearer for foreign buyers. So when the REER sits well above 100, the rupee has gained in real terms and exporters find it harder to compete on price.

విదేశీ మారక నిల్వలు అంటే దేశం కష్టకాలం కోసం దాచుకున్న 'బంగారు బీరువా'. అందులో నాలుగు అరలు: విదేశీ కరెన్సీ ఆస్తులు (అతి పెద్ద అర), బంగారం, ఐఎంఎఫ్ సృష్టించిన ప్రత్యేక ఉపసంహరణ హక్కులు, ఐఎంఎఫ్‌లో మన వాటా. ఎగుమతులు ఆగినా దిగుమతులు కొనడానికి, అప్పులు తీర్చడానికి, రూపాయి కుదుపులు తగ్గించడానికి ఇవి పనికొస్తాయి. ఎన్ని నెలల దిగుమతులకు సరిపోతాయి అన్నది ఒక కొలత. రిజర్వ్ బ్యాంకు డాలర్లు కొన్నప్పుడు బయటికి వచ్చిన రూపాయలను తిరిగి లాగేసుకోవడాన్ని 'స్టెరిలైజేషన్' అంటారు. (→ English: foreign exchange reserves · हिन्दी: विदेशी मुद्रा भंडार)

In exam EnglishIndia's foreign exchange reserves, held and managed by the RBI under the RBI Act and FEMA, have four components: foreign currency assets (by far the largest, invested mainly in safe foreign government securities and deposits), gold, Special Drawing Rights (an international reserve asset created by the IMF in 1969), and the reserve tranche position, India's readily drawable claim on the IMF. Reserves are a safety net: they pay for imports if export earnings dry up, meet external debt payments, reassure investors, and give the RBI the means to smooth the rupee. Adequacy is judged by measures such as import cover (how many months of imports the reserves can pay for) and the ratio of reserves to short-term external debt. When the RBI buys dollars to stop the rupee rising, it releases rupees into the system; it can absorb them through open market operations or the Market Stabilisation Scheme, a process called sterilisation.

విదేశీ ప్రత్యక్ష పెట్టుబడి అంటే విదేశీయుడు మన దేశంలో 'ఇల్లు కట్టుకుని ఉండటం' లాంటిది — కంపెనీలో దీర్ఘకాల వాటా, నిర్వహణలో మాట. లిస్టెడ్ కంపెనీలో 10 శాతం లేదా అంతకంటే ఎక్కువ వాటా తీసుకుంటే అది ఈ పెట్టుబడి; లిస్ట్ కాని కంపెనీలో ఎంత పెట్టినా ఇదే. రెండు దారులు: ఆటోమేటిక్ దారి — ముందు అనుమతి అక్కర్లేదు, తర్వాత రిజర్వ్ బ్యాంకుకు తెలియజేస్తే చాలు; ప్రభుత్వ దారి — సంబంధిత మంత్రిత్వ శాఖ అనుమతి కావాలి. (→ English: foreign direct investment · हिन्दी: प्रत्यक्ष विदेशी निवेश)

In exam Englishforeign direct investment is investment by a non-resident that brings a lasting interest in, and usually a say in managing, an Indian enterprise. The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 draw the line precisely: any investment by a person resident outside India in an unlisted Indian company counts as FDI, and so does investment of 10 per cent or more of the post-issue paid-up equity capital, on a fully diluted basis, of a listed company. This 10 per cent threshold follows the recommendation of a committee chaired by Arvind Mayaram in 2014. FDI enters by one of two routes. Under the automatic route no prior approval is needed; the investment is only reported to the RBI afterwards. Under the government route, approval comes from the ministry or department concerned through an online facilitation portal, after the Foreign Investment Promotion Board was abolished in 2017.

విదేశీ ప్రత్యక్ష పెట్టుబడిని ఎందుకు ఆహ్వానిస్తారు? ఫ్యాక్టరీని మధ్యాహ్నానికల్లా అమ్మేసి వెళ్లిపోలేరు — అందుకే ఇది స్థిరమైన డబ్బు; దానితో కొత్త సాంకేతికత, ఉద్యోగాలు, ఎగుమతి అవకాశాలు వస్తాయి. చాలా రంగాల్లో 100 శాతం వరకు అనుమతి ఉంది, కొన్నిటికి పరిమితి. లాటరీ, జూదం, చిట్ ఫండ్లు, రియల్ ఎస్టేట్ వ్యాపారం, సిగరెట్ తయారీ, అణుశక్తి వంటివాటిలో అసలు అనుమతి లేదు. 2020 నుంచి మన దేశంతో భూసరిహద్దు ఉన్న దేశాల పెట్టుబడికి ప్రభుత్వ అనుమతి తప్పనిసరి — ఇంటి పక్కవాడికి గేటు తాళం చెవి ఇచ్చేముందు ఆలోచించినట్టు. (→ English: foreign direct investment · हिन्दी: प्रत्यक्ष विदेशी निवेश)

In exam EnglishWhy does policy court FDI? Because it is the most stable form of foreign capital: a factory cannot be sold off in an afternoon, and it often brings technology, management practice, jobs and access to export markets. The Department for Promotion of Industry and Internal Trade frames FDI policy, and most sectors now allow foreign ownership up to 100 per cent under the automatic route, though some carry caps or need government approval. A few activities are closed to FDI altogether, among them lottery, gambling and betting, chit funds, real estate business, the manufacture of cigars and cigarettes of tobacco, and atomic energy. Press Note 3 of 2020 requires any investment from an entity of a country that shares a land border with India, or whose beneficial owner is situated in or is a citizen of such a country, to come only through the government route.

విదేశీ పోర్ట్‌ఫోలియో పెట్టుబడి అంటే కంపెనీని నడపాలన్న ఆసక్తి లేకుండా, లాభం కోసమే షేర్లు, బాండ్లు కొనడం — 'అద్దెకు ఉండటం' లాంటిది. ఇలాంటి పెట్టుబడిదారులు సెబీ దగ్గర నమోదు చేసుకోవాలి; ఒక్కొక్కరి వాటా 10 శాతం లోపే ఉండాలి, దాటితే తగ్గించుకోవాలి లేదా అది ప్రత్యక్ష పెట్టుబడిగా మారుతుంది. ఈ డబ్బు మార్కెట్‌కు బలమిస్తుంది, కానీ బయట వడ్డీ రేట్లు పెరగగానే ఎగిరిపోతుంది — అందుకే 'హాట్ మనీ'. (→ English: foreign portfolio investment · हिन्दी: विदेशी पोर्टफोलियो निवेश)

In exam Englishforeign portfolio investment is the purchase of shares, bonds and similar securities by non-residents mainly for returns, without seeking control. Foreign portfolio investors must register with SEBI under the SEBI (Foreign Portfolio Investors) Regulations, 2019, and each investor's holding in a listed company must stay below 10 per cent of its equity; if it crosses that line, the investor must either sell down within a short window or have the holding treated as FDI. Portfolio money adds depth to Indian markets and helps finance the current account deficit, but it is quick to leave when global interest rates rise or risk appetite falls, which is why it is often called 'hot money'. The 2013 taper tantrum, described in Part 1, was a portfolio outflow.
FDI and FPI compared
FeatureForeign direct investmentForeign portfolio investment
PurposeLasting interest, a say in managementFinancial return, no control
Listed company threshold10% or more of post-issue paid-up equityBelow 10% per investor
Unlisted companyAny investment counts as FDINot applicable
Who sets the rulesDPIIT policy; FEMA Non-debt Instruments Rules; reported to RBISEBI registration (FPI Regulations, 2019); FEMA rules
StabilityLong-term, hard to withdrawCan leave quickly ('hot money')
Typical exampleA foreign carmaker builds a plant in IndiaA foreign fund buys shares on an Indian exchange

ఇంకో రెండు దారులు యాజమాన్యం కాదు, అప్పు తెస్తాయి. విదేశీ వాణిజ్య రుణాలు — మన కంపెనీ విదేశీ బ్యాంకు నుంచి తీసుకునే అప్పు; ఖర్చు, కాలం, ఏ పనికి వాడాలో రిజర్వ్ బ్యాంకు నియమాలు పెడుతుంది. ప్రవాస భారతీయుల డిపాజిట్లు మూడు రకాలు: NRE — రూపాయిల్లో, పూర్తిగా వెనక్కి తీసుకెళ్లవచ్చు; FCNR(B) — డాలర్లలోనే ఉంటుంది కాబట్టి రూపాయి పడినా డిపాజిటర్‌కు నష్టం లేదు; NRO — ఇక్కడ వచ్చే అద్దె వంటి ఆదాయం, బయటికి తీసుకెళ్లడానికి ఏటా పరిమితి. ఏడాదిలో తీర్చాల్సిన అప్పు ఎక్కువైతే ప్రమాదం — 1991 పాఠం అదే. (→ English: external commercial borrowing · हिन्दी: बाह्य वाणिज्यिक उधार)

In exam EnglishTwo other channels bring in debt rather than ownership. external commercial borrowing (ECB) is a loan that an eligible Indian company raises from abroad, through bank loans, bonds or similar instruments, under a framework the RBI runs under FEMA, with limits on cost, maturity and end use. Deposits by non-resident Indians come in three main types: NRE accounts, held in rupees and fully repatriable; FCNR(B) accounts, held in foreign currency, so the bank rather than the depositor bears the exchange risk; and NRO accounts, which hold income earned in India and can be repatriated only up to a yearly ceiling. Together with trade credit and official loans, these make up India's external debt, which the Ministry of Finance and the RBI report regularly. Analysts watch the debt's size relative to GDP and, above all, the share falling due within a year, because short-term debt is what turned the 1991 squeeze into a crisis.

ఇప్పుడు అన్నీ కలుస్తాయి: చెల్లింపుల శేషంలో రాసిన లావాదేవీలే మార్కెట్‌లో డాలర్ ధరను — మారకపు రేటును — నిర్ణయిస్తాయి; రిజర్వ్ బ్యాంకు నిల్వలతో కుదుపులను మెత్తబరుస్తుంది. విదేశీ డబ్బును స్థిరత్వం బట్టి చూస్తారు: ఫ్యాక్టరీ పెట్టే డబ్బుకు స్వాగతం, షేర్ల డబ్బుకు పరిమితులు, స్వల్పకాలిక అప్పుకు గట్టి కళ్లెం. 1991, 2013 పాఠాలు అన్నిటిలోనూ కనిపిస్తాయి. (→ English: exchange rate · हिन्दी: विनिमय दर)

In exam EnglishThe pieces now fit together. Flows recorded in the balance of payments meet in the foreign exchange market, where they set the exchange rate; India lets that rate float but the RBI leans against sharp swings, using reserves that are built up when inflows are strong. Effective exchange rates, especially the REER, show whether the rupee's level is helping or hurting competitiveness. On the capital side, policy ranks foreign money by stability: FDI is welcomed and mostly automatic, portfolio flows are welcome but capped and watched, and debt, especially short-term debt, is kept on a tighter leash. The lessons of 1991 and 2013 run through all of it. The institutions that shape these flows from outside India, the IMF, the World Bank and the WTO, are the subject of the next chapter.

Exam traps

Recap

Practice questions

Q1. In a market-determined system, if the exchange rate moves from ₹84 to ₹87 per US dollar, the rupee has:

  1. appreciated
  2. depreciated
  3. been devalued
  4. been revalued
Show answer

Answer: B. depreciated

More rupees are now needed for one dollar, so the rupee has lost value through the market: a depreciation. 'Appreciated' is the opposite movement, and devaluation and revaluation are official decisions under a fixed or pegged system, not market changes, so the other options are wrong.

Q2. Consider the following statements about a depreciation of the rupee:
1. It tends to make Indian exports cheaper for foreign buyers.
2. It reduces the rupee cost of repaying loans taken in US dollars.
Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2
Show answer

Answer: A. 1 only

Statement 1 is correct: each dollar now buys more rupees' worth of Indian goods. Statement 2 is wrong: after depreciation more rupees are needed to buy each dollar of repayment, so the rupee cost of dollar debt rises. Hence '2 only', 'Both' and 'Neither' are wrong.

Q3. Consider the following pairs (step in India's exchange rate policy : time):
1. Rupee linked to a basket of currencies : September 1975
2. Liberalised Exchange Rate Management System (dual rate) : March 1992
3. Unification into a single market-determined rate : March 1993
How many of the pairs given above are correctly matched?

  1. Only one
  2. Only two
  3. All three
  4. None
Show answer

Answer: C. All three

All three pairs are correct: the basket peg began in September 1975, LERMS with its 60:40 dual rate in March 1992, and the rates were unified in March 1993. So 'only one', 'only two' and 'none' are wrong.

Q4. Consider the following statements:
1. The nominal effective exchange rate of the rupee is calculated against the US dollar alone.
2. The real effective exchange rate adjusts the nominal effective exchange rate for differences in inflation between India and its trading partners.
Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2
Show answer

Answer: B. 2 only

Statement 1 is wrong: the NEER is a trade-weighted average against a basket of currencies (the RBI uses 6 and 40 currencies), not the dollar alone. Statement 2 is correct. So '1 only', 'Both' and 'Neither' are wrong.

Q5. Which one of the following is NOT a component of India's foreign exchange reserves?

  1. Foreign currency assets
  2. Gold
  3. Special Drawing Rights
  4. Deposits of non-resident Indians in Indian banks
Show answer

Answer: D. Deposits of non-resident Indians in Indian banks

The reserves held by the RBI consist of foreign currency assets, gold, SDRs and the reserve tranche position in the IMF, so the first three options are components. NRI deposits are liabilities of Indian banks to non-residents and a capital inflow, not reserve assets, so they are the correct answer.

Q6. Consider the following statements:
1. Under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, an investment by a person resident outside India of 10 per cent or more of the post-issue paid-up equity capital of a listed Indian company is treated as foreign direct investment.
2. FDI under the automatic route requires prior approval of the Reserve Bank of India.
Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2
Show answer

Answer: A. 1 only

Statement 1 is correct and reflects the 10 per cent line recommended by the Mayaram committee. Statement 2 is wrong: the automatic route needs no prior approval from the RBI or the government; the investment is only reported afterwards. So '2 only', 'Both' and 'Neither' are wrong.

Q7. The 'impossible trinity' in international economics states that a country cannot simultaneously have:

  1. a fixed exchange rate, free capital movement and an independent monetary policy
  2. low inflation, high growth and a fiscal surplus
  3. a current account deficit, a capital account surplus and rising reserves
  4. free trade, a floating exchange rate and an independent monetary policy
Show answer

Answer: A. a fixed exchange rate, free capital movement and an independent monetary policy

The trilemma concerns a fixed exchange rate, open capital flows and independent monetary policy: only two can be kept at once. Low inflation with growth and a surplus is a policy goal, not the trinity; a current account deficit with larger capital inflows and rising reserves is India's usual pattern and is perfectly possible; and a floating rate is what allows independent monetary policy, so the other options are wrong.

Q8. Consider the following pairs (deposit scheme for non-resident Indians : feature):
1. NRE account : held in rupees and fully repatriable
2. FCNR(B) account : held in foreign currency
3. NRO account : freely repatriable without any limit
How many of the pairs given above are correctly matched?

  1. Only one
  2. Only two
  3. All three
  4. None
Show answer

Answer: B. Only two

Pairs 1 and 2 are correct. Pair 3 is wrong: NRO accounts hold income earned in India and can be repatriated only up to a yearly ceiling. So 'only one', 'all three' and 'none' are wrong.

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