Quizzes

A share of household financial savings goes towards government borrowings.

• In India, households invest in various financial instruments, including bank deposits, pension funds, insurance schemes, and government securities.
• A portion of these savings is indeed channeled into government borrowings through the purchase of government bonds and securities, thereby helping the government to finance its deficit and undertake public expenditures​​.

Dated securities issued at market-related rates in auctions form a large component of internal debt.

• The Indian government raises funds through the issuance of dated securities, which are long-term government bonds with a fixed maturity date.
• These securities are issued at market-related rates, determined by the dynamics of demand and supply in the market. The government conducts auctions for these securities, attracting bids from various financial institutions and investors.
• These dated securities constitute a significant portion of the government’s internal debt, which represents the debt owed by the government to domestic creditors​​.

Source: https://compass.rauias.com/current-affairs/analysis-public-debt-india/#:~:text=Central%20government's%20debt%20stood%20at,over%20the%20next%20financial%20year.

Acquiring new technology is capital expenditure.

• This statement is correct. Capital expenditure (CapEx) refers to the funds used by a company to acquire, upgrade, or maintain long-term assets such as property, technology, equipment, or buildings. Acquiring new technology falls under the category of capital expenditure as it involves purchasing a long-term asset that will benefit the company for more than one accounting period.

Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.

• This statement is incorrect. Financing, whether through debt or equity, is not classified as either capital expenditure or revenue expenditure. Instead:

• • Debt financing is when a company borrows money and pays interest on the borrowed funds. The borrowed money can be used for various purposes, including capital expenditure or working capital.
  • Equity financing is when a company raises money by selling shares of the company to investors. The funds raised through equity financing can also be used for various purposes, including capital expenditure or working capital.

Revenue expenditure, on the other hand, refers to the ongoing costs incurred by a company in its normal course of business, such as salaries, rent, utilities, and office supplies.

"Indirect transfers" refer to situations where a foreign company owns shares in another foreign company, and those shares derive a substantial portion of their value from assets located in India. In such cases, the transfer of these shares between two foreign entities is considered an indirect transfer of Indian assets, and may be subject to taxation in India.

This concept gained prominence after the 2012 Vodafone case, where the Supreme Court of India ruled that Vodafone was not liable to pay taxes on its purchase of Hutchison Whampoa's stake in Hutchison Essar, an Indian company. Following this, the Indian government amended the Income Tax Act in 2012 to introduce the concept of taxing indirect transfers retrospectively from 1962.

The real sector of the economy refers to the part of the economy that produces goods and services, rather than the part that is concerned with buying and selling on the financial markets. In other words, it is the part of the economy that produces tangible, measurable output.

• Farmers harvesting their crops: This is a real sector activity as it involves the production of tangible goods (agricultural produce).
• Textile mills converting raw cotton into fabrics: This is also a real sector activity as it involves the production of tangible goods (fabrics).
• A commercial bank lending money to a trading company: This is not a real sector activity. It is a financial sector activity as it involves the provision of financial services (lending money).
• A corporate body issuing Rupee Denominated Bonds overseas: This is also not a real sector activity. It is a financial sector activity as it involves raising funds through financial instruments (bonds).

Government can reduce the coupon rates on its borrowing by way of IIBs:

• This statement is correct. Inflation-Indexed Bonds (IIBs) are bonds where the principal and interest payments are adjusted for inflation. This means that the government can offer a lower coupon rate on these bonds compared to traditional bonds because investors are protected against inflation.

IIBs provide protection to the investors from uncertainty regarding inflation:

• This statement is correct. IIBs are designed to protect investors from inflation risk. The principal and interest payments on these bonds are linked to an inflation index, such as the Consumer Price Index (CPI). If inflation rises, the principal and interest payments also increase, thus providing a hedge against inflation.

The interest received as well as capital gains on IIBs are not taxable:

• This statement is incorrect. The interest received on IIBs is taxable as per the investor's marginal tax rate. Moreover, capital gains arising from the sale of IIBs are also taxable. Long-term capital gains (if IIBs are held for more than 12 months) are taxed at 10% (without indexation) or 20% (with indexation), while short-term capital gains are taxed as per the investor's marginal tax rate.

Source: http://arthapedia.in/index.php/Inflation_Indexed_Bonds_(IIBs)

If the inflation is too high, Reserve Bank of India (RBI) is likely to sell government securities, rather than buying G-Secs. Hence , the first statement is incorrect. By elimination method, the correct answer would be (b).

The nominal exchange rate measures the current value of a currency against another. For example, $ 1 = Rs 70. Hence, an increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.

The real exchange rate is represented by the following equation: real exchange rate = (nominal exchange rate) X (domestic price/ foreign price).

So, while the nominal exchange rate tells how much foreign currency can be exchanged for a unit of domestic currency, the real exchange rate tells how much the goods and services in the domestic country can be exchanged for the goods and services in a foreign country.

Thus, Real Exchange rate is directly corelated to Prices of domestic goods. If the prices of domestic Goods is higher, the Real Exchange rate would also be higher.

In case of higher Real Exchange rate, Domestic Goods are costlyà Export of Domestic Goods will reduce.

Foreign Goods are cheaper Import of Foreign Goods will increase.

Thus, overall trade competitiveness of a country reduces.

Both "Rapid Financing Instrument (RFI)" and "Rapid Credit Facility (RCF)" are related to International Monetary Fund (IMF).

Both "Rapid Credit Facility (RCF)" and "Rapid Financing Instrument (RFI)" provide rapid and concessional financial assistance to low income countries facing an urgent BoP need.