External Sector & Capital Flows

Statement 1 is incorrect. Typically, the RBI uses open market operations to sell government securities to drain money from the system and control inflation. Buying government securities would inject money into the system, potentially fueling inflation further. Statement 2 is correct. Selling dollars in the market - If the rupee is rapidly depreciating, the RBI might intervene in the foreign exchange market by selling dollars from its reserves. This increased supply of dollars in the market can help stabilize the exchange rate and slow down the depreciation of the rupee. Statement 3 is correct. Lower interest rates in the US/EU make India a more attractive destination for foreign investment, leading to a large inflow of dollars. This causes the rupee to strengthen (appreciate). To prevent the rupee from appreciating too rapidly and hurting exporters, the RBI buys the excess dollars from the market.

Pair 1 is incorrectly matched. China has not established any permanent military base in Chad. Pair 2 is correctly matched. Guinean special forces staged a coup, captured President Alpha Conde, replaced governors with the military, and dissolved the constitution and National Assembly. Pair 3 is correctly matched. Lebanon has been experiencing a severe and prolonged economic depression since 2019, driven by political instability, inadequate reforms, and systemic corruption. The economic crisis has affected approximately 74% of the population. Pair 4 is correctly matched. Tunisian President Kais Saied dissolved the suspended parliament after lawmakers held an online meeting and voted to repeal presidential decrees. He called it a failed coup attempt.

Statements 1 and 3 are correct. Vietnam’s open economic policy of recent years integrating into global supply chains has made the growth success story possible. Vietnam's export-led growth strategy and global integration are among the key factors behind the country's remarkable achievements in growth and poverty. Vietnam was one among the few countries to post GDP growth rate figures in 2020 when the pandemic hit. Vietnam is projected to be the fastest-growing internet economy in Southeast Asia in the next 10 years. Statement 2 is not correct. Vietnam is a one-party communist state, not a multi-party parliamentary democracy. Statement 4 is correct. Thanks to an abundance of low-wage labour, Vietnam's manufacturing sector grew at a compound annual growth in the last decade. As the rest of East Asia developed and wages there rose, global manufacturers were lured by Vietnam's low labour costs and stable exchange rate. Hence, Statement 5 is not correct. According to the Asian Development Bank Report, e-services including digital financial services are at a very nascent stage in Vietnam.

Statement 1 is correct. When a country devalues its currency, it becomes cheaper for foreign buyers to purchase the country's exports. This can lead to increased demand for exports, making domestic producers more competitive in the international market. Statement 2 is incorrect. Devaluation actually decreases the foreign value of the domestic currency. The whole point is to make the domestic currency less expensive relative to foreign currencies. Statement 3 is also incorrect. While improved export competitiveness can lead to a better trade balance (more exports, fewer imports), it's not a guaranteed outcome. Other factors like import prices, global demand, and domestic production costs can also influence the trade balance. Devaluation can also lead to increased import costs if the country relies on imported raw materials. Therefore, the correct code is 1 only.

Foreign Direct Investment (FDI) typically involves a long-term interest and control in a company. However, the definition includes specific instruments and thresholds. Statement 1 and 3 are correct: Foreign Currency Convertible Bonds (FCCBs) and Global Depository Receipts (GDRs) are instruments used by Indian companies to raise capital abroad. Since these are essentially precursors to equity (convertible to shares) or represent underlying shares, they are treated as part of the FDI policy framework and statistics under the "Foreign Investment" category. Statement 2 is correct: Foreign Institutional Investment (FII)—now largely subsumed under Foreign Portfolio Investment (FPI)—is generally considered short-term. However, with certain conditions, it becomes FDI. According to international standards and the Arvind Mayaram Committee recommendations adopted by India, if an FPI holds a stake of 10% or more in a company, it is reclassified and treated as FDI. Statement 4 is incorrect: Non-Resident External (NRE) deposits are simply bank accounts held by NRIs in India. These are classified as External Debt (if repatriable) or Banking Capital, not foreign investment in a productive enterprise.

Statement 1 is correct: The Federal Reserve's monetary policy decisions, particularly regarding interest rates, can impact global capital flows. If the Fed raises interest rates, it can make US investments more attractive, potentially leading to some outflow of capital from India. This could affect demand for Indian government bonds and influence their yield. Statement 2 is correct: The RBI's monetary policy plays a crucial role in influencing Indian government bond yields. The RBI's actions like setting repo rates, open market operations, and cash reserve ratio (CRR) can affect the overall liquidity in the banking system. Higher liquidity can lead to lower yields, and vice versa. Statement 3 is correct: Inflation expectations and short-term interest rates are important factors for investors when considering the return on government bonds. Higher inflation expectations can lead investors to demand higher yields to compensate for the potential erosion of purchasing power. Similarly, short-term interest rates can act as a benchmark for bond yields. Therefore, all three factors significantly influence the yields of Indian government bonds.

During the Gupta dynasty (c. 320–550 CE), external trade flourished and several coastal towns emerged as significant maritime centres. Ghantasala and Kadura were located on the eastern coast (Andhra region) and functioned as active ports facilitating overseas commerce, particularly with Southeast Asia and other regions. Ghantasala: Located in present-day Andhra Pradesh, Ghantasala served as an eastern coastal port actively engaged in maritime trade with Southeast Asia and possibly even with the Roman world. Kadura: Also located in the Andhra region (eastern coast), Kadura functioned as a significant port under the Gupta-era trade network and handled trade goods like textiles, spices, and ivory. Chaul:  located on the western coast in present-day Maharashtra, acted as a western seaport linking India with Western Asia and was known for trade in cotton textiles and other goods.

* The term "West Texas Intermediate" (WTI), often seen in news reports, refers to a grade of crude oil. WTI is used as a benchmark for oil pricing in North America. * Specifically, WTI is a light, sweet crude oil, meaning it has a low density and low sulfur content. This makes it easier and more desirable to refine into gasoline and other products. WTI serves as one of the main benchmarks for oil prices globally. * West Texas Intermediate (WTI) and Brent Crude are two of the most important global benchmarks for crude oil prices. Brent Index is used as a benchmark for oil pricing globally, including Europe, Asia, and Africa.

Not depending on short-term foreign borrowings: This reduces exposure to capital flight. During a crisis, foreign investors may pull their money out of emerging markets like India, leading to rupee depreciation and financial instability. By limiting short-term foreign borrowings, India can lessen the impact of such capital flight. Opening up to more foreign banks: While this might seem beneficial, it can also increase reliance on foreign capital. During a crisis, foreign banks might be more likely to restrict credit, negatively impacting the Indian economy. Maintaining full capital account convertibility: This allows for the free movement of capital in and out of the country. While it can be beneficial in normal times, it can also exacerbate capital flight during a crisis. Therefore, the most prudent strategy is to reduce dependence on short-term foreign borrowings to minimize the vulnerability caused by potential capital flight. Hence, only statement 1 is correct. Hence, option A is the correct answer.

In the context of the International Monetary Fund (IMF), "Gold Tranche" (also referred to as "Reserve Tranche") refers to a specific portion of a member country's quota that can be accessed under specific conditions. Here's a breakdown International Monetary Fund (IMF): An international organization that works to promote global financial stability and economic cooperation. Quota: The amount of financial resources a member country is obligated to contribute to the IMF. This contribution is based on the country's economic size and importance in the global trade system. Reserve Tranche: The first 25% of a member country's quota that can be accessed without needing IMF approval or paying any interest or service charges. It's essentially a readily available credit line. Hence, option D is the correct answer.