[Mission 2023] STATIC QUIZ, 10 March 2023 – Economy

Solution: d)

Movements in the FCA occur mainly on account of purchase and sale of foreign exchange by the RBI, income arising out of the deployment of the foreign exchange reserves, external aid receipts of the Central Government and changes on account of revaluation of the assets.

Solution: b)

• Anti-dumping duty is different from countervailing duty. The countervailing duty is imposed in order to counter the negative impact of import subsidies to protect domestic producers.
• Countervailing Duties (CVDs) are tariffs levied on imported goods to offset subsidies made to producers of these goods in the exporting country.
• CVDs are meant to level the playing field between domestic producers of a product and foreign producers of the same product who can afford to sell it at a lower price because of the subsidy they receive from their government.
• Anti-dumping duty is a customs duty on imports providing a protection against the dumping of goods at prices substantially lower than the normal value whereas Countervailing duty is a customs duty on goods that have received government subsidies in the originating or exporting country.
• Anti-dumping measures are taken to ensure fair trade and provide a level playing field to the domestic industry. 

Solution: b)

The BoP is essentially the overall ledger of how much rupee was demanded by the rest of the world and how much foreign currency (that is, currencies of all countries) was demanded by Indians.

The BoP is divided into two “accounts” — current and capital. Current account refers to all transactions that are related to current consumption; capital account refers to transactions for investment purposes.

Each bucket is sub-divided into smaller buckets. This allows policymakers and analysts to better understand the dynamics of the relative demand for rupees (by foreigners) and forex (among Indians).

All transactions involving export or import of goods (cars, gadgets etc) are logged under the “trade account” within the current account.

But people also trade in “invisibles”. Essentially, this refers to export and import of services (such as an Indian company selling software to an American firm, or a European bank providing financial services to some Indians, or simply Indians working abroad sending back money to their families in India).

The capital account, on the other hand involves investments (such as an Indian buying land in the US, or a Japanese firm investing in the Indian stock exchange) as well as exchange of loans between India and other countries.

Solution: c)

Reserve assets are currencies or other assets, such as gold, that can be readily transferable and are used to balance international transactions and payments.

A reserve asset must be readily available, physical, controlled by policymakers, and easily transferable.

The U.S. dollar is a reserve currency, meaning it is widely held as a reserve asset around the world.

Reserve assets accounted for 68.5% of India’s international financial assets in September 2021. 

Solution: d

The exchange rate depends upon many factors. They are:

1. Inflation
2. Interest rates in the country and global majors like USA
3. International commodity prices
4. Political stability
5. Forex reserves with RBI
6. Growth rate of the economy
7. Future potential
8. Foreign trade profile which includes import dependency
9. Monetary policy of countries like USA
10. External debt levels, particularly the short-term commercial debt level
11. The extent of convertibility of the currency
12. Fiscal and Current account deficits