Mrunal » [Economic Survey Ch6] Balance of Payments, Forex Reserves, Currency Exchange, NEER, REER » Print

8/12/2019 Mrunal [Economic Survey Ch6] Balance of Payments, Forex Reserves, Currency Exchange, NEER, REER Print

1/14


mrunal .org/2013/04/economic-survey-ch6-balance-of-payments- forex- reserves-currency-exchange-neer-reer .html /pr int/ 1/14

[Economic Survey Ch6] Balance of Payments, Forex Reserves, Currency

Exchange, NEER, REER

1. What is Balance of Payment?

2. Why BoP = 0 in theory?

3. Convertibility

4. Rupee-Dollar Exchange rate

5. Building up Foreign Exchange Reserves

6. FOREIGN EXCHANGE RESERVES

7. FOREX Reserve: India vs other

8. Why volatility in rupee?9. How did rupee recover?

10. Exchange Rate of Other Emerging Economies

11. NEER and REER

12. Why is REER important?

13. External Debt

14. FDI Restrictiveness Index (FRI)

15. FDI: defense offset

16. CHALLENGES AND OUTLOOK

17. Mock Question

What is Balance of Payment?

Ifyou want to see a companys incoming and outgoing cash, youve to checkits accountbook.Similarly Balance of Payment (BoP) is the summary / account sheet thatshows the cash flow between India and rest of the world.

BoP is made up of two parts: Current account and capital account. (As per

IMF definition, three parts: Current Account + Capital account+ financialaccount).Without getting into technical details, just a brief over view:

Balanceof Payment

Current AccountCapital (andfinancial) Account

1. Import, Export (always negative, becausewe export less and import more oil n gold,hence weve trade deficit.)

2. Income from abroad (interest, dividendspaid on Indian investors FDI, FII in USA

1. Foreign investment inIndia (FDI, FII, ADR,

direct purchase of land,assets).
http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#663http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#616http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#601http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#578http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#441http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#342http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#137http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#118http://mrunal.org/http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#663http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#640http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#616http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#601http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#578http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#441http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#390http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#381http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#342http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#277http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#252http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#228http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#195http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#137http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#118http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#70http://mrunal.org/2013/04/economic-survey-ch6-balance-of-payments-forex-reserves-currency-exchange-neer-reer.html/print/#1http://mrunal.org/


2/14



etc.)3. Transfer (gift, remittances from NRI to

their families etc. always positive for India

because of large Diaspora abroad.)

2. External commercialborrowing, externalassistance etc.

Note: current account can be calculated using Visible and invisibles, that

was explained in old article on current account deficit click me.Since we want to track the flow of cash, so, whenever American invest in India

(via FDI, FII, ADR etc) we add it as (+), andwhen Indians invest in USA (via FDI, FII, IDR etc.) we add it as (-) and then getthe final figure for Foreign investment.Same goes for everything in balance of payment (remittances, Externalcommercial borrowing whatever.)

In short, BoP= we are tracking the incoming and outgoing money.For India, current account has been in deficit (negative number) and capitalaccount has been in surplus (positive number).The BoP accounting system is similar to double entry book-keeping.Therefore theoretically, balance in current account and balance in capital

account should be same (ignoring the +/- signs).In other words, if there is deficit in current account, there has to be equalsurplus in capital account. Why?

Why BoP = 0 in theory?

Assume there are only two countries India (rupees) and USA (dollars). Andthere are no forex agents or middlemen, taxation, regulation, cricketers,

politicians, saah-bahu serials nothingNow Indian importer buys Apple6 phones worth 10 billion US$ fromAmerican exporter. Since there is no forex agent, the Indian importer will pay500 billion Indian rupees to that American exporter. (assuming 1$=50 Rs.)Means that much Rupee currency is gone from Indian system via current

account.But that American exporter has no use of Indian rupees! He lives in USA, hecannot even buy a burger from local McDonalds shop using Indian rupees. So

what can he do?1. He can import something else from India (e.g. raw material, steel and

plastic for further production of Apple6) = our rupee currency comesback to India via current account.

2. He can invest that Indian currency to setup some factory or jointventure in India (=our rupee currency comes back to India via capital

account)3. He can buy some shares or bonds in India. Again our rupee currency

comes back.

4. He can find a 2ndAmerican who wants to import something from India /wants to invest in India. Apple6 guy can sell his rupee currency to thatthird American fellow @Rs.50=1$ or Rs.49=1$ or Rs.99=1$

(depending on the desperation of that 2ndAmerican fellow).
http://mrunal.org/2012/05/economy-current-account-deficit-how-to.html


3/14



In short, if rupee goes out, it has to come back. (same for dollar, fromAmerican point of view).Therefore, current account + capital account = ZERO (balance of Payment),

atleast in theory.But in reality, RBI or tax authorities never have complete details of allfinancial transactions and currency exchange rates keep fluctuating. Hencethere will be statistical discrepancies, errors and omissions and. So, BoP is

expressed as:

Current Account + Capital account + Net errors and omissions = 0 (Balance ofPayment).

In IMF definition, we can express this as

Current Account + Capital account + Financial account + balancing item = 0

Ok then does it mean a country can never have surplus (or deficit) in Balance

of payment?Well, a country can have TEMPORARY surplus or deficit in BoP. Because,BoP is calculated on quarterly and yearly basis. There is a good chance, thatAmerican Apple6 exporter may not invest back all those 500 billion Indian

rupees in India within that time-frame.Secondly, Indian Government may put some FDI/FII restrictions so Apple6exporter (or that third American guy) cannot re-invest in India even if he wantsto.But in the long run, system will balance itself. for example

Apple exporter will find some fourth American importer and convincehim to pay Indian exporter in rupee currency and thus apple guy will getrid of his 500 billion Rupees by exchanging it with that Americanimporters dollarOr the apple exporter will find some NRI living in USA. This NRI wants

to send money (dollar earned by working in USA) to his family back inIndia, (preferably in Indian currency ) so this NRI will be willing toexchange his dollar savings with that Apple exporters rupees.There are many other possibilities and combinations but the point is,

in BoP, whatever currency goes out of the country, will come back tothe country.

Convertibility

Suppose you want to import a dell computer from USA. And Americanexporter accepts only payments dollars.If you can easily convert your rupee into dollars, that means Rupee is fullyconvertible. And rupee is fully convertible as far as Current account

transactions are concerned (e.g. import, export, interest, dividends).But rupee is partially convertible for capital account transection. (In crudeterms it means, if an Indian wants to buy assets abroad or invest via FDI/FIIOR borrow via External commericial borrowing (ECB) he cannot do it beyond

the limits prescribed by RBI. (And vice versa e.g. American wants to convert


4/14



his dollars to rupees to invest in India, then also RBIs limits have to befollowed).RBI gets power to do ^this, via FERA and FEMA Acts.

1973: Foreign Exchange Regulations Act, 1973 (FERA).1997: Tarapore Committee (of RBI), had recommended that India should havefull capital account convertibility. (Meaning anyone should be allowed tofreely move from local currency into foreign currency and back, without any

restrictions by Government or RBI.)2002: Government replaced FERA with Foreign Exchange Management Act(FEMA). Although full capital account convertibility is yet not given.Full capital account convertibility has both pros and cons. But thatd require

another article. Lets get back to the topic, we are seeing the 6thchapter of

Economic Survey: Balance of Payment, exchange rates etc.

Rupee-Dollar Exchange rate

How does Fixed Exchange Rate systemwork? and how does market basedexchange rate system work? = explained in the Bretton woods article. Clickme

Anyways, lets construct a bogus technically incorrect model to understand

the market based exchange rate system, once again:Assume following things

There are only two countries in the world India and America.India has rupee currency. Indian farmers dont grow Onions.America doesnt have any currency, they trade using onions. The rate

being 1kg onion=Rs.50First situation: American investor thinks that Indian economy is rising. If weinvest in India (FDI/FII), well make good profit. So theyre more eager toconvert their onions to Indian rupee currency. So theyd even agree to sell 1kgonions =Rs.45. (and then buy Indian shares/bonds worth Rs.45)

Result =Rupee strengthenedagainst onion (dollar).During this time, RBI governor also buys 300 billion kilo onions from theforex and stores these onions in his refrigerator. (Why? Because onions areselling cheap! And why onions are selling cheap? Because there is surge in

capital investment in India by American investors.)Ok everything is going nice and smooth. Now add third country to our bogusmodel: UAE.Second situation: UAE has increased crude oil prices, and they dont acceptrupee currency. They also want payment in onions.

1 barrel of crude oil costs 132kg of Onions.India is eager/desperate for oil, because if we dont have crude oil, we cantget petrol, diesel= whole economy will collapse.So India would agree to buy 1kg onion even for Rs.55 (from American orforex agent or whoever is willing to sell his onions). Then India can give that

onions to some Sheikh of UAE and import crude oil.Third situation: The Sheikh of UAE gets even greedier, he demands 200kgonions for 1 barrel of crude oil. Now 1kg onion sells for Rs.59, Becausethose with onion surplus (vendors) know that India likes it or not, itll have to
http://mrunal.org/2012/05/bretton-woods.html#25http://mrunal.org/2012/05/bretton-woods.html#108


5/14



buy onions to pay for the crude oil!Thus, Rupee has weakenedagainst onion (Dollar.)If such situation continues, then there will be huge inflation in India (because

crude oil expensive=petrol/diesel expensive = transport expensive=milk/vegetables and everything else transported using petrol/diesel becomesexpensive.)

Now RBI governor decides to become the hero and save the fall of rupee

against onion. So, He loads a few tonnes of onions in his truck and drive it tothe forex market.Result: onion supply has increased, price should go down.

Now onions get little cheaper: 1kg onion =53 Rs.Thus RBIs intervention in the forex market has led to recovery of rupee.

Ok so what do we get from this story?

1. RBIs intervention to buy Foreign exchange during surge in capital

investment= leads to build-up of (foreign exchange) reserves, which providesself-insurance against external vulnerability of rupee.

2. When RBI sells its foreign exchange reserves, it stems (halts) the fall ofrupee.

3. Higher foreign exchange reserve levels restore investor confidence and maylead to an increase in foreign direct and indirect investment flows= boost ingrowth and helps bridge the current account deficit.

Building up Foreign Exchange Reserves

Prior to 1991, India followed License-quota-inspector (and suitcase) raj and

import substitution strategy. (Beautifully explained class 11 NCERTtextbook.)During that era, foreign companies couldnt invest in India.Imported products such as radio / camera/ wristwatches attracted heavy

custom duty. (And that led to rise of smugglers and mafias, and the Bollywoodmovies that romanticized their criminal lives.)On the other hand, thanks to the license-quota-inspector (and suitcase) raj, the

private Indian companies werent big or efficient enough to compete in

international market so export was also low.Result: during that time incoming money (via export, investment) was verylow. Hence RBI couldnt build up huge forex reserve. (when onion supply islow, its prices will be high)Ultimately in 1991, the Forex reverses of India were about to exhaust.Finally India had to pledge its gold to IMF and get loans.

Then India had to open up its economy for private and foreign sectorinvestment. Remove the license-quota-inspector raj etc. to boost theincoming flow of dollars and other foreign currencies..all those LPG

reforms. (Although suitcase raj still continues, because the Mohans in thesystem are blinded by totally awesome people like A.Raja.)

fast-forward: now weve a trillion dollar economy, our software andautomobile companies are globally recognized blah blah blah.


6/14



But the lesson learnt: RBI should have good foreign exchange reserve.Hence post LPG reforms, RBI has been buying dollars, pound yen etc. fromthe currency market, whenever FII/FDI inflow is high. Because during such

situation, the foreign investors are more eager to get their dollars convertedto rupee currency hence rupee is trading at higher rate e.g. 1$=Rs.49But after global financial crisis, RBI has stopped building forex reservesactively.

Nowadays RBI intervenes in the forex market, only to stop the excessvolatility (fluctuation) in rupee exchange rate.However, there was a sharp decline in rupee in 2011-12. Then RBI had to sellforeign exchange worth 20 billion dollars. (so demand of foreign currencywould decrease and rupee would stop).Similarly in 2012 also RBI had to sell its foreign exchange reserve worth 3

billion dollars to prevent the fall of rupee. (in June 2012, Rupee had becamevery weak: 1$=around 57 Rupees. Thanks to RBI and Governmentsinterventions, it came back to the normal 53-54 level at the end of 2012.)

FOREIGN EXCHANGE RESERVES

Indias foreign exchange reserves is made up of

1. Foreign currency assets (FCA) (US dollar, euro, pound sterling, Canadian

dollar, Australian dollar and Japanese yen etc.)2. gold,3. special drawing rights (SDRs) of IMF4. Reserve tranche position (RTP) in the International Monetary Fund (IMF)

The level of forex reserve is expressed in US dollars. Hence Indias forex reserve

declines when US dollar appreciates against major international currencies and viceversa.

RBI gains Foreign exchange reserves by

buying foreign currency (via intervention in the foreign exchange market

Funding from the International Bank for Reconstruction and Development

(IBRD), Asian Development Bank (ADB), International DevelopmentAssociation (IDA) etc.aid receipts,interest receipts

FOREX Reserve: India vs other

Country wide- China has the largest forex reserve (3300+ billion USD). India

is 8thposition (close to 300 Billion USD).

Countries with largest Forex reserves

1. China

2. Japan


7/14



3. Russia4. Switzerland5. Brazil

6. South Korea7. Hong Kong8. India

Why volatility in rupee?

Volatility = Variation in something over the given time.if today SENSEX is 12000 points, tomorrow it goes up by 200 points and dayafter it goes down by 300 points etc..they we say market is volatile.

If morning shifts SSC paper is too easy but evening shifts SSC paper is toodamn difficult then we can say SSC paper is volatile.Similarly, if there is too much fluctuation in Dollar to rupee exchange rate,we say rupee is volatile.

In 2012, the rupee has experienced unusually high volatility. Why?

#1: import-export

Demand for Indian goods and services has declined due to Euro-zone crisis +America hasnt fully recovered.

On the other hand, cost of import= very high due to oil and heavy gold import(due to high inflation).Similarly high inflation = raw material / services become costly for theexport. If he raises the prices, then his export product becomes less

competitive than Cheap China made stuff.

#2: FII

In the total foreign investment in India, majority comes from FII (and notfrom FDI).

FII money is hot, it leaves quickly whenever FII investors feels that Indiasmarket is not giving good returns and or some other xyz countrys market is

giving better returns.There are week-to-week variation in such FII inflows and outflows. Hence itleads to changes in rupee-dollar exchange rate.

#3: Dollar is strengthened

US treasury bonds are consider the safest investment. During the peak ofEurozone, Greece crisis, the big investors started pulling out money from

Europe and investing it in US treasury bonds. = demand of dollar increased.

So other currencies would automatically weaken against dollar.

#4: policy paralysis

For past few years, Indian Government was lazy regarding environmental


8/14



project clearances, land acquisition, FDI in retail, pension, insurance etc. thathas led to foreign investors losing faith in Indian economy= slowdown in FIIinflows. (besides Government did not allow more FDI in pension / insurance /

retail etc. so FDI inflow did not increase either).

#5: Risk On / Risk off

From the earlier article on debt vs equity, Government bonds = safer thanequities (shares). But when an investment is safe= it doesnt offer good

returns.When foreign investors feel confident, they display risk on behavior =theyinvest more in equities, particularly in developing countries. (which are risky

but offer more profit).

But when foreign investors are not feeling confident, they display risk offbehavior, = they usually fall back to investing in US treasury bonds or gold.In India, majority of foreign investment comes from FII (and not FDI)

and FII investors are more prone to displaying this risk-on/risk-offbehavior.They plug in their money quickly, they pull out their money quickly. Thus,

Indian rupees exchange rate becomes volatile against Dollar.Therefore, Indian Government needs to inspire and sustain the confidence offoreign investors, to prevent the fall of rupee. RBI intervention in forexmarket, cannot help beyond a level.

How did rupee recover?

Rupee is weakening against dollar, it means demand of rupee is less than the demandfor dollars. So how did RBI and Government fix it?

RBI Govt.

During 2012, RBI sold around 3 billion dollars

from its forex reserves.Oct-12, Rupee recovers, 1$=around 51 rupees.RBI allowed Indian banks to give more intereston Foreign Currency Non-Resident (FCNR)

bank accounts. (thus attracting more NRIs to

save their dollars in Indian banks).

Govt. allowed FIIsto invest moremoney in govt.andcorporate bonds.

Govt. eased the FDIpolicy for pension,insurance, aviation,multi-brand retailetc.

Govt. offeredsubsidies and tax

benefits toexporters.

Exchange Rate of Other Emerging Economies


9/14



In 2012, Rupee wasnot the only currency that weakened against dollar.The currencies of other emerging economies, such as Brazilian real,Argentina peso, Russian rouble, and South Africas rand also depreciated

against the US dollar.It means dollars demand has increased. In the wake of sovereign debt crisis inthe euro zone and due to uncertain global economic environment, more andmore investors are preferring to buy US treasury bonds and other securities in

USA.

NEER and REER

We keep reading bad headlines that rupee weakened against dollarrupee all

time low against dollarand so on.Does it mean, Indian rupee is a really bogus weak and fragile currency? Nope.Because we dont trade only with USA.We dont trade only in terms of Rupee to Dollar exchange.

We also trade with many other countries in many other forms of currency.Therefore, if we want to objectively measure Rupees volatility, weve tocompare its price fluctuations with multiple currencies (Euro, Yen, Poundetc.) and not just against single Dollar currency.Secondly: 1$=Rs.50 or 1$=Rs.40 that alone doesnt decide the demand of

goods and services between India and America. This demand also depends onthe inflation (both in India and in USA.)

NEER and REER index (calculated by RBI), help us here get a clear picturehere.

First youve to calculate NEER. Then using NEERs, you calculate REER.

NEER REER

Nominal Effective Exchange RateReal Effective Exchange Rate(REER)

The weighted average of bilateral nominalexchange rates of the home currency in

terms of foreign currencies.

weighted average ofnominal exchange

rates, adjusted forinflation.

Why is REER important?

REER captures inflation differentials between India and its major trading

partners.REER reflects the degree of external competitiveness of Indian productsREER captures movements in cross-currency exchange rates.

RBI calculates two REER indices:

REER-6 REER-36

Here Indian rupee is measured against 6 big


10/14



currencies viz.

1. Dollar2. Hong Kong dollar

3. Euro4. Pound sterling5. Japanese Yen

6. Chinese Renminbi

As the name suggest, 36currencies.

Now Indian rupees vs. other currencies (Dec. 2012 data)

Just for reference:

1 unit of foreign currency Worth Rs.

Indonesian Rupiah 0.006

S.Korean Won 0.05

Pakistan Rupee 0.56

Yen 0.65

Thailand Baht 1.78

Mexican Peso 4.25

Chinese Renminbi 8

Brazilian Real 26

Turkish LIRA 30

US Dollar 54

Canadian Dollar 55Euro 71

SDR of IMF 84

Pound 88

External Debt

World Bank has released International Debt Statistics, 2013It contains the debt numbers for the year 2011.

According to those statistics, in 2011 India was in fourth position in terms ofabsolute external debt stock after China, the Russian Federation and Brazil.

At the end of March 2012, Indias external debt stock = 345 billion (near to17 lakh crore rupees.)

Indias external debt is high because of

Higher NRI deposits (since NRIs are not getting much return on their dollarsavings in American banks, they prefer to invest it in India).

External Commercial borrowings (by Indian corporates)Corporate borrowers in India and other emerging economies are keen toborrow in foreign currency (dollar and Euro). Because in US/EU right now the

market is down, not many loan domestic taker businessmen, hence theirbanks/ investors dont mind giving loans to foreigners (that is Indian / other


11/14



Asian businessmen) at very low interest rate and longer EMIs.

But such borrowings however, are not always helpful, especially in times ofhigh currency volatility. For example, if Indian businessman had borrowed

loans from USA when 1$=49 rupees but after some years, if 1$=57 rupee,then hell have to repay more. This will badly affect not just him but to IndiasBoP as well.

FDI Restrictiveness Index (FRI)

Prepared by OECD.A score of 1 indicates a closed economy and 0 indicates openness.China is ranked #1 (=it is the most restrictive country)

India is ranked fourthForeign Direct Investment (FDI) is preferred to the foreign portfolioinvestments primarily because FDI is expected to bring modern technology,managerial practices and is long term in nature investment.

The Government has liberalized FDI norms overtime. As a result, only ahandful of sensitive sectors now fall in the prohibited zone and FDI is allowedfully or partially in the rest of the sectors.

FDI: defense offset

At present, 26% FDI is allowed in Indian defense sector. It also requiresFIPB approvallicensing under Industries (Development & Regulation) Act, 1951

has to follow guidelines on FDI in production of arms & ammunition.India needs to open up the defense production sector to get access and ensuretransfer of technology.The existing FDI policy for defence sector provides for offsets policy.(meaning the foreign company has to buy or outsource some of its work to

local /domestic players. E.g. FDI in multibrand retail, mandates that foreigncompany must buy 30 percent of the from small-scale industries.)Such offset policy soften the balance of payments impact and/or develop localtechnical capability.

Recently Government revised the offsets policy for defense sector.But still, it has shown no visible direct or indirect benefits h on the domesticIndian defence industry.

CHALLENGES AND OUTLOOK

while capital inflows in India, were sufficient to finance the CAD safely.But majority of the capital flows are via FII (hence volatile)= this has led tofinancial fragility and is reflected in rupee exchange rate volatility.

We cannot significantly increase our exports in the short run because they aredependent upon the recovery and growth of partner countries (US, EU). Andthis may take time.Therefore our main focus has to be on curbing imports, mainly by making oil

prices more market determined (=expensive), and curbing imports of gold.


12/14



We should put greater emphasis on FDI including opening up sectors further.Finally, external commercial borrowing needs to be monitored carefully.

Misc. facts

Three top countries from where FDI comes to India: Mauritius, Singapore andUK

Global Economic Prospects= this report is published by world bank.

Mock Question

1. Which of the following, is not a part of Capital account

a. FDIb. FIIc. Remittancesd. External commercial borrowing

2. Which of the following is not a part of Current account?a. Import

b. Exportc. External commercial borrowingd. Interest, dividends paid on FII

3. India has deficit in

a. Current accountb. Capital accountc. Bothd. None

4. India has surplus in

a. Current accountb. Capital accountc. Bothd. None

5. Indias official forex reserve doesnt includea. Foreign currency assets (FCA) (US dollar, euro, pound sterling,

Canadian dollar, Australian dollar and Japanese yen etc.)b. Gold

c. Silverd. Special drawing rights (SDRs)

6. How can RBI build its foreign exchange reserve?a. By Buying foreign currency

b. via funding from World Bank, ADB etc.c. Both

d. None7. Which of the following country has second largest forex reserves in the

world?

a. Indiab. France

c. Japand. USA


13/14



8. Among the countries with largest forex reserves, India ranksa. second

b. third

c. fifthd. eighth

9. Rupee will strengthen against dollar whena. Government eases FDI policy

b. Government raises the ceiling on FII investmentc. Bothd. None

10. Correct statementa. NEER is calculated by RBI

b. REER is calculated by Finance ministry

c. bothd. none

11. REER captures

a. difference in inflation between India and its trading partnersb. external competitiveness of Indian products

c. Bothd. none

12. Which of the following currency is not part of REER-6 calculation?a. Hong Kong Dollar

b. Japanese Yenc. Pound Sterlingd. Canadian Dollar

13. Incorrect Matcha. S.Korea: won

b. Mexico: Pesoc. Argentina: Pesod. S.Africa: Baht

14. Which of the following is not released by World Bank?a. International Debt Statistics, 2013

b. FDI Restrictiveness Indexc. Global Economic Prospectsd. All of Above

15. FDI Restrictiveness Index is released bya. IMF

b. ADBc. OECDd. World Bank

16. Majority of FDI to India, comes from

a. Mauritiusb. Germanyc. USA

d. None of above

URL to article: http://mrunal.org/2013/04/economic-survey-ch6-balance-of-


14/14


payments-forex-reserves-currency-exchange-neer-reer.html

Posted By Mrunal On 23/04/2013 @ 23:48 In the category Economy

Documents

Mrunal » [Economic Survey Ch6] Balance of Payments, Forex Reserves, Currency Exchange, NEER, REER » Print