Current Affairs Focus

Classes
Indian Economy
Class-5
SL.
TOPICS
NO.

1 RBI’s Steps to control Rupee Depreciation

2 Reverse Currency War

3 Record FDI Inflows

Topic 1: RBI’s Steps to control Rupee Depreciation

The RBI has recently announced measures to attract more dollars through banking deposits and foreign investment to counter
Rupee Depreciation.
External Commercial Borrowings (ECBs)
ECBs are commercial loans that eligible resident entities can raise from outside India, i.e., from a recognized non-resident entity.
The ECBs are governed under Foreign Exchange Management Act (FEMA), 1999.
● Currency of borrowing: Both Foreign currency denominated, and Rupee denominated loans.
● Forms of borrowing: Loans from foreign Banks, Bonds and Debentures, Trade Credits beyond 3 years.
● Eligible borrowers: All entities eligible to receive FDI.
● Minimum Average Maturity Period (MAMP): 3 years and above in most of the cases. However, they are certain
exceptions where maturity period can be 1 year.
● Routes for borrowing:
● Automatic Route: Eligible borrowers can borrow without seeking prior approval of RBI.
● Approval Route: Prior approval of RBI needed.
● Limit: All eligible borrowers can raise ECB up to $ 750 million or equivalent per financial year under the automatic route.
Exemption from CRR and SLR on NRI Deposits: At present, banks are required to include foreign currency denominated NRI
deposits for computation of Net Demand and Time Liabilities (NDTL) for maintenance of CRR and SLR. The RBI has now exempted
Banks from maintaining CRR (cash reserve ratio) and SLR (statutory liquidity ratio) on incremental deposits into the foreign
currency denominated NRI accounts. This step would reduce banks’ costs and enable them to pass on the benefits to customers.
Higher Interest rates on NRI Deposits: The RBI imposes ceiling limit on the interest rates on the NRI deposits. The RBI has now
temporarily removed the upper limit on interest rates. This would enable the Banks to increase the increase the interest rates on
NRI deposits to attract more dollar inflows.

Topic 2: Reverse Currency War

What is Currency War?
Currency war is said to take place when countries seek to devalue their currency to gain a competitive advantage. If a particular
country devalues its currency to boost exports, then it would prompt even other countries to do the same. Thus, it may lead to a
situation of competitive devaluation where each country seeks to reduce the value of a currency to remain competitive.

What is Reverse Currency War?

In case of Reverse Currency war, countries compete to strengthen their domestic currencies. Such policy is adopted to counter
rapid depreciation in the domestic currency due to US Fed Bank policies. For example, adoption of Fed Tapering in US could lead
to depreciation of domestic currencies. The depreciation of domestic currency would have adverse impact in terms of imports
being costly, higher inflation, higher dollar outflows etc. Hence, to counter such adverse impacts, countries would strengthen their
domestic currencies by injecting more dollars.

Topic 3: Record FDI Inflows

Foreign direct investment (FDI): Major source of non-debt financial resource for the economic development.
Nodal Department: Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry makes
policy pronouncements on FDI through Consolidated FDI Policy Circular/Press Notes/Press Releases which are notified by the
Department of Economic Affairs (DEA), Ministry of Finance.
Definition: Investment through capital instruments by a person resident outside India (a) in an unlisted Indian company; or (b) in
10 percent or more of the post issue paid-up equity capital in a listed Company.
Eligible Capital Instruments:
● Shares
● Convertible debentures
● Global Depository Receipts/ American Depository Receipts
● Foreign Currency Convertible Bonds (FCCBs)
Routes:
● Government Route: Application in Foreign Investment Facilitation Portal 🡪 Concerned Administrative
Ministry/Department. Proposals of more than Rs 5000 crores to be approved by CCEA.
● Automatic Route: No Prior Approval of the Government.
Prohibited Sectors: Lottery Business; Gambling and betting including casinos; Chit funds and Nidhi company; Trading in
Transferable Development Rights (TDRs); Real Estate Business or Construction of Farm-Houses; Manufacturing of Cigars;
Activities/ sectors not open to private sector investment viz., (i) Atomic energy and (ii) Railway operations
Important Pointers for Prelims
● Countries attracting highest FDI in 2021: USA ($ 250 bn); China; Hong Kong, Singapore, and India. India is placed at 5th
Position.
● Trends: India received its highest ever FDI inflows of around $ 83 bn in 2021-22.
● Top FDI Sources for FDI (2021-22): Singapore, USA, and Mauritius
● Sectors attracting highest FDI (2021-22): Computer Software & Hardware, Services and Automobile.
● States attracting highest FDI Inflows (2021-22): Karnataka, Delhi and Maharashtra.

Prelims MCQ
1. Which among the following is/are included as “External Commercial Borrowings” in India?
1. American Depository Receipts (ADRs)
2. Plain Vanilla Rupee Denominated Bonds
3. Foreign Currency Exchangeable Bonds (FCEBs)
4. Trade Credits of certain maturity period.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 1, 2 and 3 only
(c) 2, 3 and 4 only
(d) 1, 2, 3 and 4

Answer: c

2. Which among the following is/are included as “Foreign Direct Investment” in India?
1. Masala Bonds
2. Global Depository Receipts (GDRs)
3. Foreign Institutional Investment with certain conditions
4. Foreign Currency Convertible Bonds (FCCBs)
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 1, 2 and 4 only
(c) 2, 3 and 4 only
(d) 1, 2, 3 and 4

Answer: c

3. Which among the following statements related to “External Commercial Borrowings (ECBs)” is/are correct?
1. All the entities eligible to receive FDI are also eligible to raise loans through ECBs.
2. Only loans raised from Banks and Foreign currency denominated Bonds are included under ECBs.
3. If the Rupee appreciates at the time of redemption of ECBs, the issuer Indian Company faces higher risks.
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: a

4. Which among the following steps is/are likely to be taken by the RBI to check Rupee Depreciation?
1. Exemption from CRR and SLR on NRI Deposits.
2. Enable Banks to reduce Interest rates on NRI Deposits.
3. Increase FPI Investment limit in G-Secs
4. Buy dollars from the domestic market.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 and 3 only
(d) 2 and 4 only
Answer: b

5. With reference to “Reverse Currency War”, sometimes seen in news, consider the following statements:
1. Under “Reverse Currency War”, countries devalue their domestic currency to reduce cost of the imports.
2. The ”Reverse Currency War” comes into being due to adoption of Quantitative Easing Policy of US Fed Bank.
3. The Reverse Currency War may lead to decrease in dollar value vis-à-vis domestic currencies.
Which among the statements given above is/are correct?
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 2 and 3 only

Answer: c

6. Which among the following is/are the likely effects of “Reverse Currency War”?
1. Decrease in value of Currencies of Emerging Economies.
2. Increase in value of dollar
3. Decrease in cost of imports for the emerging economies
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 only
(c) 2 and 3 only
(d) 3 only

Answer: d

7. Consider the following:

1. Foreign currency convertible bonds
2. Foreign institutional investment with certain conditions
3. Global depository receipts
4. Non-resident external deposits

Which of the above can be included in Foreign Direct Investments?

(a) 1, 2 and 3
(b) 3 only
(c) 2 and 4
(d) 1 and 4

Answer: a

8. With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?
(a) It is the investment through capital instruments essentially in a listed company.
(b) It is a largely non-debt creating capital flow.
(c) It is the investment which involves debt-servicing.
(d) It is the investment made by foreign institutional investors in the Government securities.

Answer: b

9. Which among the following can be considered as Foreign Investment in India?

1. A foreign entity buying shares and Bonds issued by Indian Company.
2. Investment in American Depository Receipts (ADRs) issued by Indian Company
3. Investment in India by an Indian Company which is majorly owned by foreign entity.
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
 (d) 1, 2 and 3

Answer: d

10. Which among the following instruments is/are eligible to be considered as Foreign Direct Investment into India?
1. Masala Bonds
2. Foreign Currency Convertible Bonds (FCCBs)
3. Fully and compulsorily Convertible Debentures
4. American Depository Receipts (ADRs)
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 2, 3 and 4 only
(d) 1, 2, 3 and 4

Answer: c

11. In which among the following sectors is the FDI prohibited in India?
1. Public Sector Banks
2. Digital Media
3. Manufacture of Cigarettes
4. Railway Infrastructure
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3 only
(c) 3 only
(d) 3 and 4 only

Answer: c

With reference to Foreign Direct Investment (FDI), which among the following statements is incorrect?
(a) If the investment by the existing FDI drops to below 10%, it would continue to be treated as Foreign Direct
Investment (FDI).
(b) The Sectoral Cap imposed by the Government is a composite cap on both FDI and FPI
(c) FDI is not allowed in Inventory based Model of E-Commerce
(d) FDI is prohibited in Agriculture Sector

Answer: d

Consider the following statements related to Trends in Foreign Direct Investment (FDI) into India:
1. India has received the highest ever FDI inflows in 2021-22.
2. India is among the top 5 countries in terms of global FDI inflows.
3. In terms of source of FDI, USA accounts for the highest share.
Which among the statements given above is/are correct?
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 1, 2 and 3

Answer: b

In which among the following agricultural activities is FDI allowed in India?

1. Cultivation of all Cereal Crops
2. Investment in certain Plantation sector such as Tea and Coffee
3. Cultivation of horticultural products under controlled conditions.
4. Development and production of Seeds and Planting Material
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 4 only
(d) 2, 3 and 4 only

Answer: d

Consider the following statements:

1. Both FDI and FPI can involve investments in Equity shares of an Indian Entity.
2. FPI is considered to be more volatile than FDI.
3. FDI is considered to be long term in comparison to FPI.
Which among the statements given above is/are correct?
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer: d

Which among the following Indian Entities is/are eligible to receive FDI in India?
1. Companies registered under Companies Act, 2013
2. Trusts registered in India
3. Partnership Firms
4. Limited Liability Partnerships
5. Start Ups

Select the correct answer using the code given below:

(a) 1 only (b) 1 and 2 only (c) 1, 3 and 4 only. (d) 1, 2, 3, 4 and 5 only

Answer: d

Which among the following best describes the concept of “Downstream foreign Investment” or “Indirect Foreign
Investment” into India?
(a) Foreign Investment routed through the Tax haven countries such as Mauritius, Singapore etc.
(b) Investment by an Indian company which has received FDI.
(c) Foreign investment by Indian Residents in Tax haven countries
(d) Investment by an Indian company which has received FDI and is either majorly owned or controlled by foreign
entity.

Answer: d

With reference to American Depository Receipts (ADRs), consider the following statements:
1. The ADRs are the financial instruments issued by both listed and unlisted Indian companies to raise capital from
the equity market in USA.
2. An ADR is quoted in US dollars and one ADR represents a certain number of equity shares in the Indian company.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: b