📑 Topics on this page (Jump to Topic):
📌 1. Balance of Payments (BoP)
The balance of payments = a systematic record of all economic transactions between a country's residents and the rest of the world in a year. It has two main accounts:
| Account | Components |
|---|---|
| Current account | Trade in goods (trade balance) + invisibles: services, primary income (interest, dividends), secondary income/transfers (remittances) |
| Capital (and financial) account | FDI, FPI, external commercial borrowings (ECB), foreign aid, NRI deposits |
- Balance of trade = goods exports − goods imports; India usually runs a deficit (crude oil, gold, electronics imports).
- Services exports (especially IT) and remittances (India is the world's largest recipient) reduce the current account deficit.
- Twin deficit = fiscal deficit and current account deficit together.
📌 2. Foreign Exchange Reserves
- Custodian: RBI (under FEMA 1999).
- Four components: foreign currency assets (largest), gold, Special Drawing Rights (SDRs), reserve tranche position in the IMF.
- SDR is the IMF's reserve asset (1969); basket: US dollar, euro, Chinese yuan, Japanese yen, British pound.
📌 3. Exchange Rate
| System | Meaning |
|---|---|
| Fixed | Government/central bank fixes the rate |
| Floating | Set in the market by demand and supply |
| Managed float | Market-set, but RBI steps in against sharp swings — India's system |
- Devaluation = government lowers the currency's value under a fixed rate (India: 1949, 1966, 1991). Depreciation = the currency's value falls in the market.
- A weaker rupee makes exports cheaper (they rise) and imports costlier.
- LERMS (1992) had a dual exchange rate; a unified market-determined rate from March 1993.
- The rupee is fully convertible on the current account (August 1994, IMF Article VIII) and partly on the capital account (Tarapore Committees 1997, 2006).
- Rupee symbol ₹: adopted on 15 July 2010; designed by D. Udaya Kumar.
📌 4. Foreign Trade Policy & Investment
- Foreign Trade Policy 2023: from 1 April 2023, with no fixed end date; administered by the Directorate General of Foreign Trade (DGFT).
- Dumping = selling abroad below cost/home price; DGTR recommends anti-dumping duty.
- Terms of trade = export price index ÷ import price index × 100.
- FDI has two routes: automatic (no prior approval) and government (approval needed); policy is made by DPIIT.
⚠️ Exam Traps:
- Remittances fall in the current account (secondary income), not the capital account.
- FDI and ECB are in the capital account; services in the current account.
- Devaluation is a government decision; depreciation is a market process.
- The rupee is not fully convertible on the capital account.
💡 Memory Tip: Current = income and trade (flows); capital = investment and loans (assets/liabilities).
📌 5. Practice MCQs
📝 Practice MCQs (prepared by SF Prep — not PYQs)
Q1. The balance of trade is the difference between: Practice
Correct answer: (C)
The balance of trade is only the gap between visible (goods) exports and imports.
The balance of trade is only the gap between visible (goods) exports and imports.
Q2. Remittances sent by overseas Indians are recorded in which part of the BoP? Practice
Correct answer: (D)
Remittances are unilateral transfers (secondary income) in the invisibles of the current account.
Remittances are unilateral transfers (secondary income) in the invisibles of the current account.
Q3. Which of these is a capital account item? Practice
Correct answer: (A)
FDI changes assets/liabilities, so it is in the capital account; the others are current account items.
FDI changes assets/liabilities, so it is in the capital account; the others are current account items.
Q4. India is the world's largest recipient of: Practice
Correct answer: (D)
As per World Bank data, India is the largest recipient of remittances.
As per World Bank data, India is the largest recipient of remittances.
Q5. A fiscal deficit and current account deficit occurring together is called: Practice
Correct answer: (A)
When both deficits occur together they are called twin deficits.
When both deficits occur together they are called twin deficits.
Q6. What is the largest component of India's forex reserves? Practice
Correct answer: (B)
Most of the reserves are foreign currency assets (holdings in dollars, euros etc.).
Most of the reserves are foreign currency assets (holdings in dollars, euros etc.).
Q7. SDR (Special Drawing Rights) is the reserve asset of which body? Practice
Correct answer: (C)
The IMF created the SDR in 1969; its basket has the dollar, euro, yuan, yen and pound.
The IMF created the SDR in 1969; its basket has the dollar, euro, yuan, yen and pound.
Q8. Which of these is NOT in the SDR basket? Practice
Correct answer: (C)
The SDR basket: US dollar, euro, yuan, yen and British pound; not the rupee.
The SDR basket: US dollar, euro, yuan, yen and British pound; not the rupee.
Q9. Which exchange rate system does India follow? Practice
Correct answer: (D)
The rupee rate is set by the market, but RBI steps in against sharp swings.
The rupee rate is set by the market, but RBI steps in against sharp swings.
Q10. A government deliberately lowering its currency's value is called: Practice
Correct answer: (A)
Devaluation is a policy decision (India: 1949, 1966, 1991); depreciation happens in the market.
Devaluation is a policy decision (India: 1949, 1966, 1991); depreciation happens in the market.
Q11. What happens to India's exports when the rupee weakens? Practice
Correct answer: (B)
A weaker rupee makes Indian goods cheaper for foreign buyers.
A weaker rupee makes Indian goods cheaper for foreign buyers.
Q12. When did the rupee become fully convertible on the current account? Practice
Correct answer: (A)
In August 1994 India accepted IMF Article VIII and made the rupee current-account convertible.
In August 1994 India accepted IMF Article VIII and made the rupee current-account convertible.
Q13. Which committee reported on capital account convertibility? Practice
Correct answer: (C)
The S. S. Tarapore Committee reported on capital account convertibility in 1997 and 2006.
The S. S. Tarapore Committee reported on capital account convertibility in 1997 and 2006.
Q14. When was the rupee symbol ₹ adopted? Practice
Correct answer: (D)
The ₹ symbol was adopted on 15 July 2010; D. Udaya Kumar designed it.
The ₹ symbol was adopted on 15 July 2010; D. Udaya Kumar designed it.
Q15. Who designed the rupee symbol ₹? Practice
Correct answer: (B)
D. Udaya Kumar, linked to IIT Guwahati, designed the ₹ symbol.
D. Udaya Kumar, linked to IIT Guwahati, designed the ₹ symbol.
Q16. Who administers the Foreign Trade Policy? Practice
Correct answer: (B)
DGFT (Commerce Ministry) implements the Foreign Trade Policy 2023.
DGFT (Commerce Ministry) implements the Foreign Trade Policy 2023.
Q17. Selling goods abroad below the home price or cost is called: Practice
Correct answer: (C)
Anti-dumping duty is imposed (on DGTR's advice) to protect domestic industry from dumping.
Anti-dumping duty is imposed (on DGTR's advice) to protect domestic industry from dumping.
Q18. How are the terms of trade calculated? Practice
Correct answer: (D)
If export prices rise faster than import prices, the terms of trade improve.
If export prices rise faster than import prices, the terms of trade improve.
Q19. In which year was the dual-rate LERMS system introduced in India? Practice
Correct answer: (A)
LERMS (Liberalised Exchange Rate Management System) came in March 1992; a unified market rate followed in March 1993.
LERMS (Liberalised Exchange Rate Management System) came in March 1992; a unified market rate followed in March 1993.
Q20. Which statement about the Foreign Trade Policy 2023 is correct? Practice
Correct answer: (D)
Unlike earlier five-year policies, FTP 2023 is open-ended and updated as needed.
Unlike earlier five-year policies, FTP 2023 is open-ended and updated as needed.