External Sector & Trade Quiz: Indian Economy Practice

Spoilers! These are the Starter quiz’s answers. Easy, Medium, Hard and Mixed rounds show their own answers when you finish.

1. Money sent home by Indians working abroad is recorded in India's balance of payments under the:

   • capital account, as foreign direct investment
   • current account, as private transfers (invisibles)
   • financial account, as external loans
   • errors and omissions

   Answer: current account, as private transfers (invisibles). Remittances are one-way transfers with no repayment obligation, so they sit in the current account under invisibles (secondary income). They are a big reason India's current account deficit stays modest despite a large goods trade deficit.

2. The rupee became fully convertible on the current account in:

   • 1991
   • 1993
   • 1999
   • 1994

   Answer: 1994. India accepted the obligations of Article VIII of the IMF in August 1994, making the rupee freely convertible for trade and other current transactions. The capital account remains only partly convertible.

3. The Foreign Exchange Management Act (FEMA), 1999 replaced which law?

   • Foreign Exchange Regulation Act, 1973
   • MRTP Act, 1969
   • Industries (Development and Regulation) Act, 1951
   • Customs Act, 1962

   Answer: Foreign Exchange Regulation Act, 1973. FEMA replaced the restrictive FERA, under which forex violations were criminal offences. FEMA made them civil matters and aims to 'facilitate' external trade and payments rather than 'regulate' them.

4. In India, an investment by a foreign investor in a listed company is treated as FDI when the holding is:

   • 5% or more of paid-up equity
   • 26% or more of paid-up equity
   • 10% or more of paid-up equity
   • 51% or more of paid-up equity

   Answer: 10% or more of paid-up equity. Following the Arvind Mayaram Committee, a stake of 10% or more is FDI and below 10% is foreign portfolio investment (FPI). FDI signals lasting management interest, while FPI is mobile 'hot money'.

5. The largest component of India's foreign exchange reserves is:

   • Gold
   • Foreign currency assets
   • Special Drawing Rights
   • Reserve tranche position in the IMF

   Answer: Foreign currency assets. Reserves have four parts: foreign currency assets (by far the largest, mostly in dollar securities), gold, SDRs and the reserve tranche position with the IMF.

6. A market-driven depreciation of the rupee against the dollar generally:

   • makes imports cheaper in rupee terms
   • reduces the rupee cost of repaying dollar loans
   • is announced by the government, unlike devaluation
   • makes Indian exports cheaper for foreign buyers

   Answer: makes Indian exports cheaper for foreign buyers. A weaker rupee means a dollar buys more Indian goods, helping exports, while imports and dollar debt become costlier in rupees. A deliberate cut in an official rate by the government is devaluation, not depreciation.

7. Which body investigates dumping and recommends anti-dumping duties in India?

   • Directorate General of Trade Remedies (DGTR)
   • Directorate General of Foreign Trade (DGFT)
   • Central Board of Indirect Taxes and Customs (CBIC)
   • Reserve Bank of India

   Answer: Directorate General of Trade Remedies (DGTR). DGTR, under the Commerce Ministry, investigates dumping (selling abroad below normal value) and recommends duties, which the Finance Ministry imposes. DGFT administers the Foreign Trade Policy.

8. A country's 'terms of trade' refer to the ratio of:

   • export volume to import volume
   • export value minus import value
   • the export price index to the import price index
   • the current account balance to GDP

   Answer: the export price index to the import price index. Terms of trade = (export price index / import price index) x 100. If export prices rise faster than import prices, terms of trade improve: each unit of exports buys more imports. Export value minus import value is the trade balance.

9. 'Masala bonds' are:

   • dollar-denominated bonds issued by Indian firms in India
   • rupee-denominated bonds issued outside India
   • gold-linked bonds issued by the RBI
   • bonds issued by states to fund spice exporters

   Answer: rupee-denominated bonds issued outside India. Masala bonds are borrowed abroad but denominated in rupees, so the foreign investor, not the Indian borrower, bears the exchange-rate risk.

10. Consider the following statements: 1. India's Foreign Trade Policy 2023 has no fixed end date. 2. Under the Liberalised Remittance Scheme, a resident individual may remit up to USD 2,50,000 per financial year. Which is/are correct?

    • 1 only
    • 2 only
    • Both 1 and 2
    • Neither 1 nor 2

    Answer: Both 1 and 2. FTP 2023 (effective 1 April 2023) broke from five-year policies and is open-ended, updated as needed. The LRS limit has been USD 2,50,000 per person per financial year since 2015.