PRELIMS मतलब MAD

Correct Answer: (a) 1 only

Statement 1 is correct. Excessive dependence on short-term foreign borrowing makes an economy vulnerable during periods of global financial instability. Such borrowings have to be repaid or refinanced within a short period. During a crisis, foreign lenders may withdraw funds or refuse to renew existing loans, creating pressure on the country's foreign exchange reserves, currency and domestic liquidity. Therefore, limiting dependence on short-term external debt can provide greater protection against global financial shocks.

Statement 2 is incorrect. Greater entry of foreign banks does not necessarily protect an economy during a financial crisis. During periods of global stress, foreign banks may reduce their exposure to the domestic economy, repatriate funds to their home countries or restrict lending. This can worsen domestic liquidity conditions rather than provide immunity.

Statement 3 is incorrect. Full capital account convertibility permits relatively unrestricted movement of capital across borders. During a financial crisis, this can facilitate sudden and large capital outflows, causing depreciation of the domestic currency and pressure on foreign exchange reserves. India's partial capital account convertibility provides some protection against such volatile capital movements.

Correct Answer: (b) It is a largely non-debt creating capital flow.

FDI is primarily an equity-based investment in which a foreign investor acquires a lasting interest in an enterprise and may also exercise a degree of management influence or control.

Its major characteristic is that it is largely non-debt creating. Unlike external loans or bonds, FDI generally does not create a fixed obligation to repay principal along with interest. This reduces the debt-servicing burden on the recipient economy.

FDI may also contribute to technology transfer, employment generation, managerial expertise, improved productivity and long-term capital formation.

Option (a) is incorrect because FDI is not restricted to listed companies. It may take place in both listed and unlisted enterprises. Investment primarily in securities of listed companies is generally associated with Foreign Portfolio Investment.

Option (c) is incorrect because debt-servicing is associated with borrowed funds on which principal and interest have to be repaid. FDI is largely equity-based.

Option (d) is incorrect because investment by foreign institutional or portfolio investors in government securities is classified as portfolio investment rather than FDI.

Correct Answer: (d) 1, 2 and 3

Non-financial debt refers broadly to debt liabilities of non-financial sectors of the economy, including households and governments.

Statement 1 is correct. Housing loans taken by households are included because households are part of the non-financial sector.

Statement 2 is correct. Outstanding credit card dues represent liabilities of individuals or households and therefore form part of household debt.

Statement 3 is also correct. Treasury Bills are short-term debt instruments issued by the Central Government. Since government debt forms part of the debt of the non-financial sector, Treasury Bills are also included.

Therefore, all three are included in non-financial debt.

Correct Answer: (b) 2 only

Expansionary monetary policy is generally adopted when the RBI wants to increase liquidity, encourage lending, reduce borrowing costs and stimulate economic activity.

Statement 1 is consistent with an expansionary monetary policy. A reduction in the Statutory Liquidity Ratio reduces the proportion of deposits that banks are required to maintain in prescribed liquid assets. This can leave banks with more funds available for lending and credit creation.

Statement 2 is not consistent with an expansionary monetary policy. The Marginal Standing Facility Rate is the rate at which eligible banks can obtain overnight funds from the RBI under the MSF mechanism. Increasing this rate makes borrowing from the RBI more expensive and tends to tighten liquidity conditions. Therefore, the RBI would normally not increase the MSF Rate while pursuing an expansionary monetary policy.

Statement 3 is consistent with an expansionary policy. Cutting the Repo Rate and Bank Rate lowers borrowing costs within the financial system and can encourage banks to expand lending.

The Statutory Liquidity Ratio is the minimum proportion of a bank's Net Demand and Time Liabilities that must be maintained in specified liquid assets such as cash, gold and approved securities.

The Marginal Standing Facility allows eligible banks to obtain overnight liquidity from the RBI against eligible securities.

The Bank Rate is an important RBI reference rate associated with its lending and monetary policy framework.

The Repo Rate is the policy rate at which the RBI provides liquidity to banks against eligible collateral through repurchase transactions. Changes in the Repo Rate influence lending rates, borrowing costs, credit conditions and monetary transmission across the economy.

Correct Answer: (d) 1, 3 and 4 only
The question was dropped by UPSC.

Statement 1 is correct. India generally records a merchandise trade deficit because the value of its merchandise imports exceeds the value of its merchandise exports.

In FY 2024-25, India's merchandise exports were around $437.42 billion, while imports remained significantly higher. Consequently, the merchandise trade deficit widened considerably.

Statement 2 is incorrect. There has not been a uniform decline in the imports of all the commodities mentioned. While imports of some categories may decline during particular periods, chemicals, fertilisers and machinery continue to form an important part of India's import basket. Therefore, a general statement that imports of all these items have decreased is incorrect.

Statement 3 is correct. India consistently earns a surplus from trade in services. Its services exports are greater than its services imports, particularly because of India's strong position in information technology, business services, consulting and other professional services.

This services surplus helps compensate for a part of India's merchandise trade deficit.

Statement 4 is correct in the context of the given explanation. India's merchandise trade deficit is generally much larger than the surplus generated through services. Consequently, India may experience an overall current account deficit when total payments on the current account exceed total receipts.