RBI’s Steps to Control Rupee Depreciation

Importance for UPSC Prelims:

• External Commercial Borrowings (ECB) Framework
• Steps taken

Prelims 2022 Prelims 2019

With reference to the Indian economy, consider the following Which one of the following is not the most likely measure the
statements: Government/ RBI takes to stop the slide of Indian rupee?
1. If the inflation is too high, Reserve Bank of India
(RBI) is likely to buy government securities. (a) Curbing imports of non-essential goods and promoting
2. If the rupee is rapidly depreciating, RBI is likely to exports
sell dollars in the market.
3. If interest rates in the USA or European Union were (b) Encouraging Indian borrowers to issue rupee denominated
to fall, that is likely to induce RBI to buy dollars. Masala Bonds
Which of the statements given above are correct?
(a) 1 and 2 only (c) Easing conditions relating to external commercial
(b) 2 and 3 only borrowing
(c) 1 and 3 only
(d) Following an expansionary monetary policy
(d) 1, 2 and 3
 Criteria Foreign Currency Convertible Bonds Foreign Currency Exchangeable Bonds
Issued by Indian Company Indian Company.
Denominated Foreign Currency Foreign Currency
Convertible into Yes Yes
Shares
Convertible into Yes. Convertible into shares of other company which
shares of same is part of same group.
company
Included as FDI Yes Yes.
 EXTERNAL COMMERCIAL BORROWINGS
Practice MCQ No. 1 Practice MCQ No. 2
Which among the following is/are included as “External Which among the following is/are included as “Foreign Direct
Commercial Borrowings” in India? Investment” in India?
1. American Depository Receipts (ADRs) 1. Masala Bonds
2. Plain Vanilla Rupee Denominated Bonds 2. Global Depository Receipts (GDRs)
3. Foreign Currency Exchangeable Bonds (FCEBs) 3. Foreign Institutional Investment with certain conditions
4. Trade Credits of certain maturity period. 4. Foreign Currency Convertible Bonds (FCCBs)

Select the correct answer using the code given below: Select the correct answer using the code given below:
(a) 1 and 2 only (a) 1 and 2 only
(b) 1, 2 and 3 only (b) 1, 2 and 4 only
(c) 2, 3 and 4 only (c) 2, 3 and 4 only
(d) 1, 2, 3 and 4 (d) 1, 2, 3 and 4
 EXTERNAL COMMERCIAL BORROWINGS
Practice MCQ No. 3
Which among the following statements related to “External
Commercial Borrowings (ECBs)” is/are correct?
1. All the entities eligible to receive FDI are also eligible to
raise loans through ECBs.
2. Only loans raised from Banks and Foreign currency
denominated Bonds are included under ECBs.
3. If the Rupee appreciates at the time of redemption of
ECBs, the issuer Indian Company faces higher risks.
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Practice MCQ No. 4
Which among the following steps is/are likely to be taken by
the RBI to check Rupee Depreciation?
1. Exemption from CRR and SLR on NRI Deposits.
2. Enable Banks to reduce Interest rates on NRI Deposits.
3. Increase FPI Investment limit in G-Secs
4. Buy dollars from the domestic market.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 and 3 only
(d) 2 and 4 only
 REVERSE CURRENCY WAR

Prelims 2021
Consider the following statements:

The effect of devaluation of a currency is that it necessarily

1. improves the competitiveness of the domestic exports in the foreign markets

2. increases the foreign value of domestic currency

3. improves the trade balance

Which of the above statements is/are correct?
(a) 1 only

(b) 1 and 2

(c) 3 only

(d) 2 and 3
 Criteria Currency War Reverse Currency War
Meaning Competitive Devaluation Competitive Revaluation
Why is it adopted? Boost Exports Reduce cost of Imports
Action taken by Buy Dollars from the domestic Sell Dollars in the domestic Market
Central Bank Market
Impact on Currency Dollar value increase Dollar value reduces
Domestic Currency’s Value reduces Domestic Currency’s Value Increases
 REVERSE CURRENCY WAR

Practice MCQ No. 5 Practice MCQ No. 6

With reference to “Reverse Currency War”, sometimes seen Which among the following is/are the likely effects of “Reverse Currency
in news, consider the following statements: War”?
1. Under “Reverse Currency War”, countries devalue their 1. Decrease in value of Currencies of Emerging Economies.
domestic currency to reduce cost of the imports. 2. Increase in value of dollar
2. The ”Reverse Currency War” comes into being due to 3. Decrease in cost of imports for the emerging economies
adoption of Quantitative Easing Policy of US Fed Bank.
3. The Reverse Currency War may lead to decrease in dollar Select the correct answer using the code given below:
value vis-à-vis domestic currencies. (a) 1 and 2 only
(b) 2 only
Which among the statements given above is/are correct? (c) 2 and 3 only
(a) 1 only (d) 3 only
(b) 1 and 2 only
(c) 3 only
(d) 2 and 3 only
 RECORD FDI INFLOWS

Prelims 2021 Prelims 2020

Consider the following: With reference to Foreign Direct Investment in India, which
1. Foreign currency convertible bonds one of the following is considered its major characteristic?
2. Foreign institutional investment with certain conditions (a) It is the investment through capital instruments
3. Global depository receipts
essentially in a listed company.
4. Non-resident external deposits
(b) It is a largely non-debt creating capital flow.
Which of the above can be included in Foreign Direct (c) It is the investment which involves debt-servicing.
Investments? (d) It is the investment made by foreign institutional
(a) 1, 2 and 3 (b) 3 only investors in the Government securities.
(c) 2 and 4 (d) 1 and 4
 Difference between FDI and FPI

CRITERIA FDI FPI

Percentage of Ownership 10% or more Less than 10%
What it includes? Transfer of Capital + Technology + Management Only Transfer of Capital
Skills
What it leads to? Ownership + Management Only Ownership
Where does it flow? Physical Assets and Financial Assets Financial assets
Nature of Investment Stable and Long term Unstable and short-term ( Hot Money)
Flexibility? Less Flexible ( Entry and Exit difficult) More Flexible ( Entry and Exit easier)
Role of Investors Active Passive
 Prelims Pointers on Foreign Direct Investment (FDI)
• Investment of 10% or more in a listed company. ( Less than 10% Investment treated as FPI)
Meaning
• Investment in an unlisted Indian Company ( Irrespective of threshold)
Who can receive • Companies, Trusts, Partnership Firms, Venture Capital Funds, Limited Liability Partnerships (LLPs), Startup etc.
FDI into India?
• Government Route: Application in Foreign Investment Facilitation Portal Concerned Administrative
Ministry/Department. Proposals of more than Rs 5000 crores to be approved by CCEA.
Routes
• Automatic Route: No Prior Approval of the Government or RBI
NOTE: FDI from a country with which India shares border is allowed only under Approval route.
Eligible Shares; Warrants; Fully, compulsorily & mandatorily convertible debentures; Foreign Currency Convertible bonds
Instruments (FCCBs); Depository Receipts
Prohibited Sectors Lottery Business; Gambling and betting including casinos; Chit funds and Nidhi company; Trading in Transferable
Development Rights (TDRs); Real Estate Business or Construction of Farm-Houses; Manufacturing of Cigars; Activities/
sectors not open to private sector investment viz., (i) Atomic energy and (ii) Railway operations
Sectoral Cap • Composite Cap of all foreign Investment i.e., both FDI and FPI
Important Pointers • Countries attracting highest FDI: USA ($ 250 bn); China; Hong Kong, Singapore and India- placed at 5th Position)
for Prelims • Trends: India received its highest ever FDI inflows of around $ 83 bn in 2021-22
• Top FDI Sources for FDI (2021-22): Singapore, USA, and Mauritius
• Sectors attracting highest FDI (2021-22): Computer Software & Hardware, Services and Automobile.
• States attracting highest FDI Inflows (2021-22): Karnataka, Delhi and Maharashtra.
DEPOSITORY RECEIPTS: ADR/GDR/IDR
 DEPOSITORY RECEIPTS: ADR/GDR/IDR
Framework for ADRs/GDRs
Governed through • Earlier, Foreign Currency Convertible Bonds and Ordinary shares (Through depository
receipt mechanism) Scheme, 1993 was repealed on the recommendations of M.S. Sahoo
Committee.
• Depository Receipt Scheme, 2014- formulated on recommendations of Sahoo Committee
• SEBI Framework for Issuance of Depository Receipts
Who can issue Only listed Indian Companies.
ADRs/GDRs?
Who cannot buy Indian Residents
ADRs/GDRs?
In which countries • Member countries of Financial Action Task Force (FATF)
depositories can be • Countries whose Securities Market regulator is a member of International Organisation of
issued? Securities Commissions.
Can Depository holders • No. Voting rights would have to be exercised by Foreign Depository on behalf of investors.
exercise voting rights
directly?
Are ADRs/GDRs considered • Yes.
as FDI into India?
 Sector Sectoral Cap Entry Route
Construction, operation and maintenance of the Railway Infrastructure: High Speed Trains, Dedicated Freight 100% Automatic Route
Corridors, Metro projects, Signalling and Electrification etc.
FDI in Agriculture in following activities only: 100% Automatic
• Floriculture, Horticulture, and Cultivation of Vegetables & Mushrooms under controlled conditions;
• Development and Production of seeds and planting material;
• Animal Husbandry, Pisciculture, Aquaculture, Apiculture;
• Services related to agro and allied sectors
FDI in Plantation Sector- Tea, Coffee, Rubber, Cardamom, Palm oil, Olive Oil ( FDI in Only these Plantations 100% Automatic
allowed)
Construction of Development Projects (Townships, Residential/Commercial Properties etc.) 100% Automatic Route

Establishment and Operation of Satellites 100% Government Route

Telecommunication 100% Automatic Route

Cash and Carry Wholesale Trading 100% Automatic Route

E-Commerce 100% Automatic

Inventory Based Model ( Not Permitted)
Market Place Model ( Permitted)
Public Sector Banks 20% Government Route

Private Sector Banks 74% Automatic up to 49%; Beyond

49%- Government Route
Insurance and Pension 74% Automatic Route

Multi-brand Retail 51% Government Route

Single Brand Retail 100% Automatic Route

 Recent Changes in FDI Policy Details
100% FDI in Coal Mining and Coal processing plants such • Earlier, allowed FDI in Coal Mining only for Captive
as Coal Washery Consumption. Now, allowed to sell coal in Open Market
• Earlier, FDI in Coal Processing plants allowed but not allowed
to sell processed coal in open Market. Now, allowed to sell
processed coal in Open Market.
100% FDI in Contract Manufacturing under Automatic Earlier, no specific Provision for Contract Manufacturing.
Route Now, it has been explicitly provided.
74% FDI in Insurance Sector Earlier, it was up to 49%.

100% FDI In Telecom Sector under Automatic Route Earlier: Automatic up to 49% Government Route beyond 49%
 Practice MCQ N0. 7 Practice MCQ NO. 8
Which among the following can be considered as Foreign Which among the following instruments is/are eligible to be considered
Investment in India? as Foreign Direct Investment into India?
1. A foreign entity buying shares and Bonds issued by Indian 1. Masala Bonds
Company. 2. Foreign Currency Convertible Bonds (FCCBs)
2. Investment in American Depository Receipts (ADRs) issued 3. Fully and compulsorily Convertible Debentures
by Indian Company 4. American Depository Receipts (ADRs)
3. Investment in India by an Indian Company which is majorly
owned by foreign entity. Select the correct answer using the code given below:
(a) 1 and 2 only
Select the correct answer using the code given below: (b) 2 and 3 only
(a) 1 only (c) 2, 3 and 4 only
(b) 1 and 2 only (d) 1, 2, 3 and 4
(c) 2 and 3 only
(d) 1, 2 and 3 Practice MCQ NO. 10
With reference to Foreign Direct Investment (FDI), which among the
Practice MCQ NO. 9 following statements is incorrect?
In which among the following sectors is the FDI prohibited in (a) If the investment by the existing FDI drops to below 10%, it would
India? continue to be treated as Foreign Direct Investment (FDI).
1. Public Sector Banks (b) The Sectoral Cap imposed by the Government is a composite cap on
2. Digital Media both FDI and FPI
3. Manufacture of Cigarettes (c) FDI is not allowed in Inventory based Model of E-Commerce
4. Railway Infrastructure (d) FDI is prohibited in Agriculture Sector

Select the correct answer using the code given below:

(a) 1 only (b) 2 and 3 only
(b) 3 only (d) 3 and 4 only
 Practice MCQ N0. 11 Practice MCQ NO. 12
Consider the following statements related to Trends in Foreign In which among the following agricultural activities is FDI allowed in
Direct Investment (FDI) into India: India?
1. India has received the highest ever FDI inflows in 2021-22. 1. Cultivation of all Cereal Crops
2. India is among the top 5 countries in terms of global FDI 2. Investment in certain Plantation sector such as Tea and Coffee
inflows. 3. Cultivation of horticultural products under controlled conditions.
3. In terms of source of FDI, USA accounts for the highest 4. Development and production of Seeds and Planting Material
share.
Select the correct answer using the code given below:
Which among the statements given above is/are correct? (a) 1 and 2 only
(a) 1 only (b) 2 and 3 only
(b) 1 and 2 only (c) 4 only
(c) 3 only (d) 2, 3 and 4 only
(d) 1, 2 and 3
Practice MCQ NO. 14
Practice MCQ NO. 13
Which among the following Indian Entities is/are eligible to receive FDI
Consider the following statements:
in India?
1. Both FDI and FPI can involve investments in Equity shares
1. Companies registered under Companies Act, 2013
of an Indian Entity.
2. Trusts registered in India
2. FPI is considered to be more volatile than FDI.
3. Partnership Firms
3. FDI is considered to be long term in comparison to FPI.
4. Limited Liability Partnerships
5. Start Ups
Which among the statements given above is/are correct?
(a) 1 only
Select the correct answer using the code given below:
(b) 1 and 2 only
(a) 1 only (b) 1 and 2 only (c) 1, 3 and 4 only. (d) 1, 3, 4 and 5 only
(c) 2 and 3 only
(d) 1, 2 and 3
 Practice MCQ N0. 15 Practice MCQ NO. 16
Which among the following best describes the concept of With reference to American Depository Receipts (ADRs), consider
“Downstream foreign Investment” or “Indirect Foreign the following statements:
Investment” into India? 1. The ADRs are the financial instruments issued by both listed and
(a) Foreign Investment routed through the Tax haven countries unlisted Indian companies to raise capital from the equity
such as Mauritius, Singapore etc. market in USA.
(b) Investment by an Indian company which has received FDI. 2. An ADR is quoted in US dollars and one ADR represents a certain
(c) Foreign investment by Indian Residents in Tax haven number of equity shares in the Indian company.
countries
(d) Investment by an Indian company which has received FDI Which of the statements given above is/are correct?
and is either majorly owned or controlled by foreign entity. (a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2