There were 16 Questions from Economy in 2022, of which

• 5 Questions on Money & Banking (RBI and inflation, CRA ,BBB, NFT, Price stability)
• 2 Questions on Economy Basics (Real Sector, Capital Expenditure)
• 2 Questions on Capital & Money Market (IIBs, Convertible Bonds)
• 2 Questions on International Institutions (Rapid Financing, G-20)
• 1 Question on BOP (Indirect Transfers) 
• 1 Question on Industry (FDI)
• 1 Question on Fiscal Policy (Debt)
• 1 Question on Exchange Rate (REER & NEER)
• 1 Question on Employment  & Unemployment (Labour Bureau)

Examiner tested candidates’ knowledge of basic concepts and understanding of current issues in Economy.

The level of the questions was moderate to tough.

Previous Year UPSC Economy Questions (PYQs) With Explanation 2022

1. “Rapid Financing Instrument” and “Rapid Credit Facility” are related to the provisions of lending by which of the following: 

(a) Asian Development Bank 

(b) International Monetary Fund 

(c) United Nations Environment Programme Finance Initiative 

(d) World Bank 

1. Ans: b

Explanation:

Financial assistance of IMF 

Unlike development banks, the IMF does not lend for specific projects. Instead, the IMF provides financial support to countries hit by crises to create breathing room as they implement policies that restore economic stability and growth. It also provides precautionary financing to help prevent crises. IMF lending is continuously refined to meet countries’ changing needs.

Crises can take many different forms 

• Balance of payment problems occur when a nation is unable to pay for essential imports or service its external debt.
• Financial crises stem from illiquid or insolvent financial institutions.
• Fiscal crises are caused by excessive deficits and debt.

Often, countries that come to the IMF face more than one type of crisis as challenges in one sector spread throughout the economy. Crises can slow growth, increase unemployment, lower incomes, and create uncertainty, leading to a deep recession. In an acute crisis, defaults or restructuring of sovereign debt may be unavoidable. 

IMF lending instruments

The Extended Fund Facility (EFF) was established in 1974 as a vehicle for longer-term external financing for members undertaking needed structural economic reforms.

The Supplemental Reserve Facility (SRF) was established at the end of 1997, at the height of the Asian financial crisis. Its purpose is to provide financial assistance to members experiencing exceptional balance of payments difficulties due to a large, short-term financing need following a sudden and disruptive loss of confidence reflected in pressure on the capital account and the member’s foreign reserves.

The Stand-by Arrangement (SBA) provides short-term financial assistance to countries facing balance of payments problems. 

The Stand-by Credit Facility (SCF) provides financial assistance to low-income countries (LICs) with short-term balance of payments needs. The SCF is one of the facilities under the Poverty Reduction and Growth Trust (PRGT).

The Extended Fund Facility (EFF) provides financial assistance to countries facing serious medium-term balance of payments problems because of structural weaknesses that require time to address. To help countries implement medium-term structural reforms, the EFF offers longer program engagement and a longer repayment period.

The Extended Credit Facility (ECF) provides medium-term financial assistance to low-income countries (LICs) with protracted balance of payments problems. The ECF is one of the facilities under the Poverty Reduction and Growth Trust (PRGT).

The Rapid Financing Instrument (RFI) provides prompt financial assistance to any IMF member country facing an urgent balance of payments need. The RFI is one of the facilities under the General Resources Account (GRA) that provide financial support to countries, including in times of crisis.

The Rapid Credit Facility (RCF) provides fast concessional financial assistance to low-income countries (LICs) facing an urgent balance of payments need. The RCF is one of the facilities under the Poverty Reduction and Growth Trust (PRGT) that provide flexible financial support tailored to the diverse needs of LICs, including in times of crisis.

The Flexible Credit Line (FCL) is designed to meet the demand for crisis-prevention and crisis-mitigation lending for countries with very strong policy frameworks and track records in economic performance.

The Short-term Liquidity Line (SLL) is a liquidity backstop for members with very strong policy frameworks and fundamentals, who face potential, moderate, short-term liquidity needs because of external shocks that generate balance of payment difficulties. It aims to minimize the risk of shocks evolving into deeper crises and spilling over to other countries.

The Precautionary and Liquidity Line (PLL) is designed to meet the liquidity needs of member countries with sound economic fundamentals but with some remaining vulnerabilities that preclude them from using the Flexible Credit Line (FCL).

The Resilience and Sustainability Facility (RSF) provides affordable long-term financing to countries undertaking reforms to reduce risks to prospective balance of payments stability, including those related to climate change and pandemic preparedness. 

The Policy Coordination Instrument (PCI) is a non-financing instrument open to all IMF member countries. It enables a closer dialogue with countries and the endorsement of policies by the IMF, which allows them to signal commitment to reforms and to catalyze financing from other sources.

Hence option b is correct.

2. With reference to the Indian economy, consider the following statements: 

1. An increase in the Nominal Effective Exchange Rate (NEER) indicates the appreciation of the rupee. 

2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness. 

3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER. 

Which of the above statements is correct? 

(a) 1 and 2 only 

(b) 2 and 3 only 

(c) 1 and 3 only 

(d) 1, 2 and 3 

2. Ans: c

Explanation:

Nominal exchange rate:

The exchange rate is the price of one currency expressed in terms of another currency.  Two conventions are used:

E: Price of home currency in terms of foreign currency 

R: Price of foreign currency in terms of home currency

                                                                               E = 1 / R

Domestic currency =  Indian Rupee

Foreign currency =     $USD

Let us consider price of home currency in terms of foreign currency (E):

80 Rs.    =     1$

1  Rs.     =     1/80 $

1 Rs.        =    0.0125$   is the nominal exchange rate

In case of appreciation of Rupee say for example,

72 Rs.      =     1$

1  Rs.     =        1/72 $

 1 Rs.      =      0.0138 $,   so the nominal exchange rate increased. 

Therefore the increase in nominal exchange rate leads to appreciation of rupee (IMF concept).

Nominal effective exchange rate:

NEER is the weighted average of nominal exchange rates where weights used are shares of trading partners in the foreign trade of a country.

For example, In foreign trade of India US share is 40%, UK share is 35%, and UAE share is 25%

Then 

NEER  =     (0.0125*40  + 0.01*35  +    0.025*25) /  100

            =       (0.5  + 0.35  +  0.625)/ 100

            =       0.01475

Like NER, increase in NEER also indicates an appreciation of the local currency against the weighted basket of currencies of its trading partners.

NER considers exchange rate between two countries, whereas NEER considers exchange rate between a country and its trading partners.

Hence statement 1 is correct 

What is the real exchange rate?

The real exchange rate (RER) between two currencies is the product of the nominal exchange rate (the dollar cost of a Rupee, for example) and the ratio of prices between the two countries.

The core equation is RER = EP*/P, 

where, in our example, E is the nominal dollar/Rupee  exchange rate, P* is the average price of a good in India , and P is the average price of the good in the United States.

Example, E = 0.0125 and for an article, 

If the Indian price is 160 rupees  and the U.S. price is $ 1

Then   RER = (0.0125) X (160 ) ÷ 1  

which yields an Real Exchange Rate of 2.

But if the Indian price were 200 rupees and the U.S. price $1, 

then RER   =   ( 0.0125) X 200 ÷ 1, 

which yields an Real Exchange Rate of 2.5.

Increase of RER indicates higher prices for the producers and less competitive.

Concept of Competitveness

Tradable goods can be produced domestically and then be sold either domestically or abroad in exchange for other goods. Competitiveness is the incentive for domestic/foreign economies to produce and/or purchase these goods in/from the domestic economy, rather than in/from foreign economies. At the level of individual producers, competitiveness is generally defined on the basis of (quality adjusted) prices: lower-price producers are more competitive.

Real Effective Exchange Rate:

REER is the real effective exchange rate (a measure of the value of a currency against a weighted average of several foreign currencies) divided by a price deflator or index of costs.

An increase in REER implies that exports become more expensive and imports become cheaper; therefore, an increase indicates a loss in trade competitiveness.

Hence statement 2 is incorrect.

If inflation in domestic country is high, more rupees have to be spent to purchase basket of goods when compared to the international level, this will lead to increase in REER. Since NEER remains nearly stable, increase in REER leads to increasing divergence between NEER and REER.

Hence statement 3 is correct.

3. With reference to the Indian economy, consider the following statements: 

1. If the inflation is too high, the Reserve Bank of India (RBI) is likely to buy government securities. 

2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.

3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars. 

Which of the statements given above are correct? 

(a) 1 and 2 only 

(b) 2 and 3 only

(c) 1 and 3 only 

(d) 1, 2 and 3 

3. Ans: b

Explanation:

Inflation is generally considered as rise in the prices. To be more correct, inflation is a persistent rise in the general price level rather than a once-for-all rise in it. On the other han, deflation represents persistently falling prices. Depending upon the specific causes, three types of inflation have been distinguished:

1. Demand-pull inflation
2. Cost-push inflation
3. Structuralist inflation

An important cause for demand-pull inflation is the excessive growth of money supply in the economy. 

According to Quantity theorists excess money supply results in the increase in aggregate demand for goods and services which leads to inflation.

If RBI buys government securities, money will be infused which leads to increase in money supply which is again inflationary.

Tight /Dear monetary policy means RBI increases  the interest rates to decrease the money supply. 

Hence, statement 1 is incorrect. 

One of the function of central Bank/ RBI is to maintain stability of exchange rates.  The Rupee exchange rate is determined by the market demand and supply.

With the objective of curbing volatility in exchange rate, RBI makes sales or purchases of foreign currency in the forex market . 

Whenever there is fall in interest rate in US , there will be flight of capital from US or capital inflows into India as a result American firms , Banks , Corporations will  invest in high yielding Indian securities. Inorder to buy  Indian securities they will have to convert Dollars to Indian Rupees , that will increase the demand for rupee. Such flows lead to appreciation of Rupee because of increase in supply of dollars in the forex market. So a relatively higher interest rate in India as compared to US will lead to depreciation of dollar and appreciation of Rupee.

When rupee appreciates RBI buys dollar creating demand for dollar and when rupee depreciates RBI sells dollar creating demand for rupee to keep the Indian Rupee from depreciating sharply. 

Such sales and purchases are not governed by a predetermined target or band around the exchange rate.

Hence, statments 2 and 3 are correct.

4. With reference to the “G20 Common Framework”, consider the following statements: 

1. It is an initiative endorsed by the G20 together with the Paris Club. 

2. It is an initiative to support low-income countries with unsustainable debt. 

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 

4. Ans: c

Explanation:

The Common Framework for debt treatment beyond the DSSI (Common Framework) is an initiative endorsed by the G20, together with the Paris Club to support, in a structural manner, Low Income Countries with unsustainable debt.

The Common Framework considers debt treatment, on a case-by-case basis, driven by requests from eligible debtor countries. In response to a request for debt treatment, a Creditor Committee is convened. Negotiations are supported by the IMF and the World Bank, including through their Debt Sustainability Analysis.

The idea is that the debt treatment under the Common Framework should be accompanied by reforms ensuring the future sustainability of public debt, and consistent with the parameters of an Upper Credit Tranche (UCT) IMF-supported program.

Hence, statements 1 and 2 are correct.

5. With reference to the Indian economy, what are the advantages of “Inflation-Indexed Bonds (IIBs)”? 

1. The government can reduce the coupon rates on its borrowing by way of IIBs. 

2. IIBs provide protection to investors from uncertainty regarding inflation. 

3. The interest received as well as capital gains on IIBs are not taxable. 

Which of the statements given above are correct? 

(a) 1 and 2 only 

(b) 2 and 3 only 

(c) 1 and 3 only 

(d) 1, 2 and 3 

5. Ans: a

Explanation:

Inflation-Indexed Bonds

Inflation-Indexed Bonds, also known as inflation Bonds, are a type of government-issued security designed to protect investors from inflation, these bonds adjust their principal value and interest payments based on the inflation rate, as measured by Consumer Price index (CPI).

If Inflation Bonds are purchased , the principal amount is adjusted periodically based on the changes in CPI  i.e if inflation rises, the bond’s principal increases, and if inflation falls, the principal decreases. As aresult , the interest payments, which are calculated as a percentage of the adjusted principal, also vary with inflation. 

Example of working IIBs:

Suppose an investor purchases an IIB with a face value of Rs. 1,00,000, a ten-year maturity, and a Coupon rate  of 3% above inflation.

If the inflation rate is 4% when the bond is issues, the investor will receive an annual interest payment of Rs. 3120 (3% of INR 1,04,000) in the first year instead of Rs.3000

If the inflation rate increases to 5% in the second year, the investor will receive an annual interest payment of Rs. 3276. 0 (3% of INR 1,09,200) in the second year. 

The Coupon rate  will remain at 3% above inflation throughout the ten-year tenure. 

IIBs will provide inflation protection to both principal and interest payments.

• Capital protection will be provided by paying higher of the adjusted principal and face value (FV) at redemption. If adjusted principal goes below FV due to deflation, the FV would be paid at redemption and thus, capital will get protected.
• Interest rate will be provided protection against inflation by paying fixed coupon rate on the principal adjusted against inflation. 

Hence statement 2 is correct.

Taxation provisions:

Extant tax provisions will be applicable on interest payment and capital gains on IIBs. There will be no special tax treatment for these bonds. 

Hence statement 3 is incorrect.

Like other G-Secs, coupon on IIBs would be paid on half yearly basis. Fixed coupon rate would be paid on the adjusted principal. 

Indexed bonds could reduce government borrowing costs: If the market overestimates future inflation, government will reduce borrowing costs by issuing indexed bonds rather than nominal bonds. This may occur because government is able to influence inflation through its policies, may have better information about the future course of inflation, or perhaps has more faith in its commitment to contain it than the public does. In these cases the government can lower its costs by issuing indexed bonds as the nominal interest rate (i) is the sum of the real rate (r) and expected inflation (p).

Hence statement 1 is correct.

6. With reference to foreign-owned e-commerce firms operating in India, which of the following statements is/are correct? 

1. They can sell their own goods in addition to offering their platforms as marketplaces. 

2. The degree to which they can own big sellers on their platforms is limited. 

Select the correct answer using the code given below: 

(a) 1 only 

(b) 2 only

(c) Both 1 and 2 

(d) Neither 1 nor 2

6. Ans: d

Explanation:

The Department of Industrial Policy and Promotion (DIPP) has issued the ‘Consolidated FDI Policy Circular of 2020’ (“FDI Policy”), which provides Foreign Direct Investment (FDI) regulations in Indian e-commerce in order to protect local retailers and small businesses from unfair competition. 

• Marketplace model: The current FDI policy in India allows 100% FDI under the automatic route for the marketplace model of e-commerce activities which means the e-retailer does not sell directly to consumers, but provides a platform to other sellers and acts as a facilitator between the buyer and the seller. 
• Inventory Model: The FDI policy in India prohibits foreign investment in the business of selling directly to consumers in the digital marketplace which means FDI is not permitted for the inventory-based model of e-commerce activities.
• B2B and B2C transactions: FDI guidelines in India allow business-to-business (B2B) e-commerce while putting restrictions on business-to-consumer (B2C) e-commerce.

This means foreign companies can establish e-commerce platforms that act as intermediaries between buyers and sellers without owning the goods sold. The policy is designed to ensure prevent price manipulation and avoid capital dumping, which could harm local businesses.

Additionally, foreign e-commerce entities must meet several conditions, including ensuring no single vendor accounts for more than 25% of their sales, submitting annual compliance reports to the Reserve Bank of India (RBI) and adhering to various GST compliance for e-commerce regulations.

Hence, both statements 1 & 2 are incorrect.

7. Which of the following activities constitute a real sector in the economy? 

1. Farmers harvesting their crops 

2. Textile mills converting raw cotton into fabrics 

3. A commercial bank lending money to a trading company 

4. A corporate body issuing Rupee Denominated Bonds overseas 

(a) 1 and 2 only 

(b) 2, 3, and 4 only 

(c) 1, 3 and 4 only 

(d) 1, 2, 3, 4 

7. Ans: a

Explanation:

Every economy as having four broad economic sectors

1. The real sector:  The real sector comprises production and expenditure in the economy. Its accounts measure the total activity in the economy, described either from the standpoint of production, expenditure, or income. 

2. The external sector: The external sector covers the relations between the economy and the rest of the world. The economic aspects of these relations are recorded in a set of accounts called the balance of payments.

3. The fiscal sector: The fiscal sector involves the activities of government and government-owned non-financial entities called public or stateowned enterprises. Fiscal data include information on government and state enterprise debt and debt service.

 4. The monetary sector: The monetary sector comprises the activities of the economy’s financial institutions, including its central bank or monetary authority, the commercial (deposit money) banks, and other financial institutions, such as investment banks, finance companies, credit unions, and any microfinance entities. 

• Farmers harvesting their crops – The Real sector
• Textile mills converting raw cotton into fabrics – The Real sector
• A commercial bank lending money to a trading company  – The monetary sector.
• A corporate body issuing Rupee Denominated Bonds overseas – The external sector.

Hence statement 1, 2 are correct and 3, 4 are incorrect.

8. Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India? 

(a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment 

(b) A foreign company investing in India and paying taxes to the country of its based on the profits arising out of its investment 

(c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India 

(d) A foreign company transfers shares and such shares derive their substantial value from assets located in India 

8. Ans: d

Explanation:

A “transfer” is a change in the direct or indirect ownership of an asset, in whole or in part, whether between independent or related parties. Transfers of ownership may give rise to a taxable capital gain (or loss). It has been defined to include sale, exchange, relinquishment and extinguishment of rights. 

Transfers can be ‘direct’ or ‘indirect’: 

A direct transfer involves the disposition of a direct ownership interest in an asset, in whole or in part. 

An indirect transfer involves the disposition of an indirect ownership interest in an asset, in whole or in part. It is the underlying asset that is being indirectly transferred. It is the transfer of shares of an overseas company which derive its value substantially, directly or indirectly from the assets located in India, are deemed to be assets situated in India. Direct or indirect transfer of such share triggers tax liability in India.

Hence, option d is correct.

9. With reference to the expenditure made by an organization or a company, which of the following statements is/are correct? 

1. Acquiring new technology is capital expenditure. 

2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.

Select the correct answer using the code given below: 

(a) 1 only 

(b) 2 only 

(c) Both 1 and 2 

(d) Neither 1 nor 2 

9. Ans: a

Explanation:

A capital expenditure (“CapEx” for short) is the payment with either cash or credit to purchase long-term physical or fixed assets used in a business’s operations and are considered an investment by a company in expanding its business.

CapEx is important for companies to grow and maintain their business by investing in new property, plant, equipment (PP&E), products, and technology.

Debt: Refers to issuing bonds to finance the business.

Equity: Refers to issuing stock to finance the business.

Debt and equity financing does not involve any expenditure.

Hence, statement 1 is correct & statement 2 is incorrect.

10. With reference to the Indian economy, consider the following statements: 

1. A share of the household’s financial savings goes towards government borrowings. 

2. Dated securities issued at market-related rates in auctions form a large component of internal debt. 

Which of the above statements is/are correct? 

(a) 1 only 

(b) 2 only 

(c) Both 1 and 2 

(d) Neither 1 nor 2 

10. Ans: c

Explanation: 

The fiscal deficit indicates the total borrowing requirements of the government from all sources. Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad. 

Net borrowing at home includes that directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks (People deposits their savings with commercial bank) through Statutory Liquidity Ratio (SLR).  

The Central Government Debt includes all liabilities of Central Government contracted against the Consolidated Fund of India (defined as Public Debt), other liabilities in the Public Account, (called Other Liabilities) and liabilities of Extra Budgetary Resources (EBR) raised by issuing GoI Fully Serviced Bonds. 

Public debt is further classified into internal and external debt. 

Internal debt consists of marketable debt and non-marketable debt. 

Marketable debt comprises of Government dated securities and Treasury Bills, issued through auctions, Cash Management Bills.

Non-marketable debt comprises of Intermediate Treasury Bills (14 days ITBs) issued to State Governments/UTs of Jammu & Kashmir and Puducherry as well as select Central Banks, special securities issued against small savings, special securities issued to public sector banks/EXIM Bank, IDBI and IIFCL, special securities issued against POLIF (Postal life insurance), securities issued to international financial institutions, and compensation and other bonds, Ways and Means advance.

External debt is the money that a country borrows from a source external to it and has to be repaid in the currency in which it was borrowed after a certain period of time. Most of the time such money is borrowed from foreign institutions like foreign commercial banks and international financial institutions such as the International Monetary Fund (IMF), World Bank, Asian Development Bank (ADB) and also from the governments of foreign nations. Majority of India’s external debt comes from multilateral institutions.

Other liabilities include liabilities on account of State Provident Funds, Reserve Funds and Deposits, Other Accounts, etc.

• Of the Central Government total gross liabilities at end-March 2022, 95.3 per cent were denominated in domestic currency while sovereign external debt constituted 4.7 per cent, implying low currency risk.Further, the sovereign external debt is mainly from official sources, which minimises the risk associated with the volatility in the international capital markets. 
• The share of marketable securities in internal debt at 76.9 per cent at end-March 2022.
• Public debt in India is primarily contracted at fixed interest rates, with floating internal debt constituting only 1.9 per cent of GDP at end-March 2022. The debt portfolio is, therefore, insulated from interest rate volatility, which also provides stability to interest payments.
• Of the overall Central Government debt, about 92 per cent is internal debt and 8 per cent is external debt. The internal debt largely consists of market loans in the form of dated securities which are contracted through auction.

Hence, both statements 1 & 2 are correct.

11. Consider the following statements: 

1. In India, credit rating agencies are regulated by the Reserve Bank of India. 

2. The rating agency popularly known as ICRA is a public limited company. 

3. Brickwork Ratings is an Indian credit rating agency. 

Which of the statements given above are correct? 

(a) 1 and 2 only 

(b) 2 and 3 only 

(c) 1 and 3 only 

(d) 1, 2 and 3 

11. Ans: b

Explanation:

A credit rating agency is an entity which assesses the ability and willingness of the issuer company for

timely payment of interest and principal on a debt instrument. Credit rating is an assessment of the

probability of default on payment of interest and principal on a debt instrument. The debt instruments rated by CRAs include Government bonds, Corporate bonds, CDs, Mortgage – backed securities and Collateralized debt obligations.

Rating is denoted by a simple alphanumeric symbol, for e.g. AA+, A- etc. Ratings are based on a comprehensive evaluation of the strengths and weaknesses of the company fundamentals including financials along with an in depth study of the industry as well as macro-economic, regulatory and political environment.

Credit rating agencies are regulated by SEBI. 

Hence, statement 1 is incorrect. 

Domestic Credit rating agencies registered with SEBI are

Credit Analysis & Research Ltd (CARE) ,

Investment Information and Credit Rating Agency of India Limited (ICRA Ltd ), 

Credit Rating and

Information Services of India Ltd (CRISIL), 

Fitch Ratings India Pvt Ltd , 

Brickwork Ratings India Pvt.Ltd., 

SME Rating Agency of India Ltd (SMERA) – Small &Medium Enterprises Rating Agency of India

Ltd., a joint initiative of SIDBI, DUN & BRADSTREET and leading banks .

Some international credit rating agencies – Standard & Poor (S&P), Moodys , Fitch .

Credit 

Hence, statement 3 is correct.

Investment Information and Credit Rating Agency of India Limited (ICRA Ltd )  was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency.

Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange.

Hence, statement 2 is correct.

12. With reference to the ‘Banks Board Bureau (BBB)’, which of the following statements is correct? 

1. The Governor of RBI is the Chairman of BBB. 

2. BBB recommends the selection of heads for Public Sector Banks. 

3. BBB helps the Public Sector Banks in developing strategies and capital-raising plans. 

Select the correct answer using the code given below: 

(a) 1 and 2 only 

(b) 2 and 3 only 

(c) 1 and 3 only 

(d) 1, 2 and 3 

12. Ans: b

Explanation:

Financial Services Institutions Bureau earlier known as Bank Board Baureau has been constituted by Central Government for the purpose of recommending persons for appointment as whole-time directors and non-executive chairpersons on the Boards of financial services institutions and for advising on certain other matters relating to personnel management in these institutions. 

The members of the government-appointed selection panel are Financial Services Secretary, Department of Public Enterprises Secretary and an RBI Deputy Governor select the Chairman of FSIB.

The functions of the Bureau as outlined in the Clause 2 of the Government Resolution are :-

a) To recommend persons for appointment as whole-time directors (WTDs) and non-executive chairpersons (NECs) on the Boards of Directors in Public Sector Banks, financial institutions and Public Sector Insurers (hereinafter referred to as “PSBs”, “FIs” and “PSIs” respectively);

b) To advise the Government on matters relating to appointments, transfer or extension of term of office and termination of services of the said directors;

c) To advise the Government on the desired management structure at the Board level for PSBs, FIs and PSIs;

d) To advise the Government on a suitable performance appraisal system for WTDs and NECs in PSBs, FIs and PSIs;

e) To build a databank containing data related to the performance of PSBs, FIs and PSIs;

f) To advise the Government on formulation and enforcement of a code of conduct and ethics for whole-time directors in PSBs, FIs and PSIs;

g) To advise the Government on evolving suitable training and development programmes for management personnel in PSBs, FIs and PSIs;

h) To help PSBs, FIs and PSIs in terms of developing business strategies and capital raising plan etc.;

i) To carry out such process and draw up a panel for consideration of competent authority for any other bank, financial institution or insurer for which the Government makes a reference, after consultation with the regulator concerned with that bank, financial institution or insurer.

Hence, statement 1 is incorrect and 2 and 3 are correct.

13. Convertible Bonds consider the following statements: 

1. As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of

interest. 

2. The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices. 

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 

13. Ans: c

Explanation:

What Is a Convertible Bond?

• Convertible bonds are powerful financial instruments that effectively combine the advantages of both bonds and stocks. These fixed-income securities not only provide regular interest payments but also grant investors the right to convert their bonds into a specified number of company shares, enabling them to directly participate in the company’s growth. When a company’s stock performs strongly, the value of convertible bonds can rise significantly, offering a robust hedge against inflation.
• Investors can strategically choose to convert their bonds into shares at a predetermined time, with specific conversion terms laid out at the bond’s issuance. This feature empowers investors to earn consistent interest while also taking advantage of potential stock price surges. Consequently, convertible bonds generally come with lower interest rates compared to traditional corporate bonds, reflecting the valuable option to convert into equity shares.
• Convertible bonds are also often traded on secondary markets, meaning investors can choose to buy or sell them before maturity.However, the liquidity of each of these types of bonds may be dramatically different depending on the issuer’s credit rating and prevailing market conditions.

Hence, statements 1 and 2 are correct.

14. In India, which one of the following is responsible for maintaining price stability by controlling inflation? 

(a) Department of Consumer Affairs 

(b) Expenditure Management Commission 

(c) Financial Stability and Development Council 

(d) Reserve Bank of India 

14. Ans: d

Explanation:

A core function of the Reserve Bank has been the formulation and implementation of monetary policy with the objectives of maintaining price stability and ensuring adequate flow of credit to productive sectors of the economy. To these was added, in more recent times, the goal of maintaining financial stability. 

The objective of maintaining financial stability has spanned its role from external account management to oversight of banks and non-banking financial institutions as also of money, government securities and foreign exchange markets.   

Hence, option d is correct.

15. With reference to Non-Fungible Tokens (NFTs), consider the following statements: 

1. They enable the digital representation of physical assets. 

2. They are unique cryptographic tokens that exist on a blockchain. 

3. They can be traded or exchanged at equivalency and therefore can be used as a medium transaction of commercial transactions.  

Which of the statements given above are correct? 

(a) 1 and 2 only 

(b) 2 and 3 only 

c) 1 and 3 only. 

(d) 1, 2 and 3 

15. Ans: a

Explanation:

An NFT or non-fungible token is a unique digital asset stored on the blockchain that serves as proof of ownership or authenticity for a digital or physical item/right. Unlike fungible assets, NFTs are one-of-a-kind and cannot be replaced. They use blockchain technology to provide decentralized, secure, and transparent records of ownership and transfers.

There is a close link between NFTs and cryptocurrencies as many NFTs are traded in cryptocurrencies.

Fundamentally, NFTs are digital certificates that hold the potential to deliver significant value for both organizations and end users. For companies, NFTs provide a new way to connect with customers and create loyal communities. For users, they provide a new avenue for inclusive ownership in digital goods.

Hence, statemetnt 2 is correct.

Non-fungible tokens, or NFTs, are digital representations of unique assets stored on the blockchain. They are a key component of Web3, allowing for new forms of digital interactions, ownership and exchange. NFTs are unique, and their ownership is recorded on the blockchain, so they cannot be duplicated or counterfeited.

Hence, statement 1 is correct.

Cryptocurrencies are usually fungible from a financial perspective, meaning that they can be traded or exchanged, one for another. This fungibility characteristic makes cryptocurrencies suitable as a secure medium of transaction in the digital economy.

In NFTs each token is unique and irreplaceable, making it impossible for one non-fungible token to be “equal” to another. They are digital representations of assets and have been likened to digital passports because each token contains a unique, non-transferable identity to distinguish it from other tokens. They are also extensible, meaning one NFT can be combines with another to create a third, unique NFT— this is called “breeding.”

Hence, statement 3 is incorrect.

16. In India, which one of the following compiles information on industrial disputes, closures, retrenchments, and lay-offs in factories employing workers?

(a) Central Statistics Office 

(b) Department for Promotion of Industry and Internal Trade 

(c) Labour Bureau 

(d) National Technical Manpower Information System 2021

16. Ans: c

Explanation:

The statistics on work-stoppages, closures, retrenchments and lockouts collected under the Industrial Disputes Act, 1947, bring out the industrial relations scenario in the country. As these statistics play a crucial role in making policies for cordial and harmonious relations between the management and the workers and also meeting the demand for historical data and information on industrial conflicts and their causes by the planners, policy makers and decision makers in industry and government . 

Labour Bureau brings out up-to-date statistics on work-stoppages, closures, retrenchments and lockouts in its annual publication titled, ‘Industrial Disputes, Closures, Retrenchments and LayOffs in industries in India’. 

Hence, option c is correct.