UPSC Static Quiz – Economy : 28 November 2025

Solution: A

Statement 1 is incorrect: The Tobin Tax applies only to foreign exchange transactions, not stock trading.

Statement 2 is correct: It was proposed by James Tobin in response to the Bretton Woods collapse.

Statement 3 is incorrect: India does not impose a Tobin Tax but has a Securities Transaction Tax (STT).

• What is Tobin Tax?
  • The Tobin Tax is a tax on foreign exchange transactionsaimed at discouraging short-term speculative trading.
  • It is a small levy (0.1%-0.5%) on currency conversions to reduce volatility in financial markets.
• Origin and Economic Theory:
  • Proposed in 1972 by James Tobin,a Nobel Prize-winning economist, in response to currency market fluctuations after the collapse of the Bretton Woods system.
  • Aimed at “throwing sand in the wheels”of currency speculation to stabilize exchange rates.
• Features of Tobin Tax:
  • Applied on currency transactionsto deter short-term speculation.
  • Low tax rateto prevent market disruption.
  • Revenue generated can be used for public welfareor development projects.

Positives and Negatives of Tobin Tax:

Does India Have a Tobin Tax?

• India does not directly impose a Tobin Tax on currency transactions.
• However, Securities Transaction Tax (STT), introduced in 2004, acts as a Tobin-like tax on stock market transactions.
• Foreign Portfolio Investments (FPIs) are also subject to taxation, indirectly influencing capital flows.

Solution: B

Option (b) is correct because India’s repo rate applies to short-term loans from the RBI to commercial banks, where banks pledge government securities as collateral. In contrast, the U.S. Fed Funds Rate applies to overnight interbank lending, meaning it governs how banks lend to each other, not borrowing from the Federal Reserve directly.

Option (a) is incorrect as the repo rate applies to all scheduled banks in India, not just government-owned banks.

Option (c) is incorrect because, while both influence liquidity and interest rates, the mechanics of their implementation differ.

Option (d) is incorrect because both rates are controlled by their respective central banks—the RBI in India and the Federal Reserve in the U.S.

Solution: D

Reciprocal tariffs often lead to protectionism, as countries retaliate by imposing counter-tariffs, escalating trade tensions.

Example: The U.S.-China trade war (2018-2020), where both nations imposed reciprocal tariffs on each other’s exports, significantly disrupting global trade.

This weakens WTO-led negotiations, rather than enhancing them, and often results in market uncertainty rather than reducing price volatility.

• What is a Reciprocal Tariff?

• • A tax on imports that mirrors the tariff charged by a country on US exports.
  • Objective: To create a “fair” trading system by equalizing tariffs globally.

• How Do Reciprocal Tariffs Work?

• • Tariff Matching: US will impose the same tariff rates that other countries apply to US goods.
  • Subsidy Consideration: The US will factor in export subsidies and incentives given by countries like India before deciding the final tariff.
  • Elimination of Differential Treatment: Developing nations, including India, will no longer get tariff relaxations, unlike in the past under WTO rules.

• How Will Reciprocal Tariffs Be Calculated?

• • Comprehensive Assessment: The US Trade Department will evaluate all direct and indirect support (e.g., tax breaks, subsidies) that other countries offer to their exporters.
  • Expected Tariff Rise: India, being a subsidy-driven economy, could face higher tariff barriers for exports like textiles, pharmaceuticals, and automobiles.
  • Deadline: Final tariff rates will be determined by April 2025.

• Impact on India
  • Exports Will Become Costlier: US may increase tariffs on Indian goods, making textiles, pharmaceuticals, and auto parts less competitive.
  • Trade Deficit Will Shrink: India may import more from the US (like defense equipment, oil, and gas) to balance trade, reducing its $38 billion trade surplus with the US.
  • Rupee May Weaken: More imports mean higher demand for US dollars, leading to a weaker rupee, increasing India’s import bill.
  • Atmanirbhar Bharat May Suffer: India’s self-reliance push may slow down if the US pressures India to buy American goods.
  • Impact on Foreign Investments: US firms may push for local production in India to avoid high tariffs, boosting FDI (Foreign Direct Investment).

Solution: D

The RBI manages the issuance and overall regulatory framework for Sovereign Green Bonds in India.

• What are Sovereign Green Bonds?

• • Debt instruments issued by governments to raise funds for eco-friendly projects that reduce carbon emissions and enhance climate resilience.

• Ministry & Implementing Agency: Ministry of Finance, with oversight from the Department of Economic Affairs (DEA).
• Aim of SGrBs:
  • Raise Capital for Green Projects: Mobilize funds for clean energy, sustainable infrastructure, and climate resilience.
  • Promote Low-Carbon Transition: Support India’s renewable energy goals under its Net Zero 2070 commitment.
  • Encourage Green Financing: Create a sustainable investment ecosystem for climate action.
• Projects Covered under SGrBs:

• • Electric Locomotive Manufacturing: Funding for energy-efficient three-phase electric locomotives.
  • Metro & Public Transport: Investments in metro rail expansion and sustainable urban mobility.
  • Renewable Energy: Support for solar, wind, and National Green Hydrogen Mission.
  • Afforestation: Funds allocated for National Mission for a Green India.

• Key Features of SGrBs:
  • Dedicated Use of Proceeds: Funds exclusively allocated to green projects, ensuring transparency and accountability.
  • Lower Interest Rates (Greenium): Typically, lower yields than conventional bonds, though India’s greenium remains weak.
  • Foreign Investor Participation: Open to global climate-focused funds to enhance demand.
  • Limited Secondary Market Liquidity: Bonds held until maturity, restricting market trading opportunities.
  • Part of India’s Green Finance Framework: Aligns with climate goals and international green bond standards.

Solution: C

Explanation:

• Rupee-Dollar Swap Auctions are conducted by the RBI to manage liquidity and reduce volatility in the currency market. Banks sell USD to RBI in exchange for INR and later repurchase the USD at a pre-agreed rate.
• While swap auctions can indirectly impact inflation by managing liquidity, their primary purpose is not inflation control but liquidity management. The RBI uses other monetary tools like repo rates and CRR adjustments for inflation control.

About Rupee & Dollar Swap Auctions:

• It is a tool used by RBIto manage liquidity in the economy and stabilize currency volatility.
• Banks sell US dollarsto RBI in exchange for rupees in the first leg and agree to repurchase dollars at a future date.
• Who Conducts It?
  • The Reserve Bank of India (RBI), as part of its monetary policy interventions, executes the swap auctions.
• How It Works?
  • First Leg (Buy Phase):Banks sell USD to RBI and receive Indian Rupees (INR).
  • Reverse Leg (Sell Phase):Banks buy back USD from RBI at a pre-determined price at the end of the swap period.
• Key Features of the Swap:
  • Tenor:Can be short-term (6 months) or long-term (3 years or more).
  • Liquidity Management:Used to infuse or absorb rupee liquidity in the system.
  • Forex Reserve Utilization:RBI uses its forex reserves to regulate currency flows.
  • Impact on Exchange Rate:Helps stabilize rupee fluctuations against the dollar.
• Impact on the Indian Economy:
  • Improves Banking Liquidity:Injects Rs 86,000 crore into the banking system, addressing the current liquidity shortfall of Rs 1.7 lakh crore.
  • Enhances Monetary Policy Transmission:Ensures that interest rates in money markets align with RBI’s policy stance.
  • Strengthens the Rupee:Reduces depreciation pressure on INR due to forex market fluctuations.
  • Supports Economic Growth:Enables banks to lend more to businesses and industries, promoting investment and consumption.
  • Controls Inflation Risks:Provides liquidity without increasing inflationary pressures, as money is infused against future forex obligations.