External Sector of India: UPSC Previous Year Questions (Indian Economy)

Explanation

Statement 1, 2 and 4 are correct: The Capital Account in a country’s Balance of Payments (BoP) records the transactions that involve the transfer of capital assets and liabilities between residents and non-residents. It primarily includes:

Foreign Loans are borrowings from foreign entities by the government, private sector, or other institutions. Foreign Direct Investment (FDI) made by foreign entities in the domestic economy, typically involving a significant degree of control or influence over the business operations. Portfolio Investment in financial assets such as stocks and bonds by foreign investors, without the intention of controlling or managing the enterprise.

Statement 3 is incorrect: Private remittances (money sent by individuals working abroad back to their home country) are considered current transfers and are part of the Current Account, not the Capital Account. They represent a flow of in-come, not a capital investment. Current Account Capital Account Meaning Records imports and exports of visible and invisibles Short term implication transactions Covers only earnings and spending. Excludes any borrowings and lending. Shows capital expenditure and income for country Long term implication transactions Only includes borrowings and lending by a country Components Visible trade (Export and Import of goods - Merchandise transactions) Invisible trade (Export and Import of services) Unilateral transactions Direct Investment (FDI) Portfolio Investment (FPI) Loans / External commercial borrowing (ECB) Non-resident investment in Bank, Insurance, Pension schemes. RBI’s foreign exchange reserve

Explanation

India’s foreign exchange reserves are the external assets maintained by the Reserve Bank of India (RBI) to man-age balance of payments, stabilize the currency, and provide a buffer against economic shocks. The components of foreign exchange reserves include:

Foreign Currency Assets (FCAs): These consist of foreign currencies held by the RBI, mainly in US dollars and other major international currencies (Euro, Pound, and Yen). These are invested in highly liquid assets, such as treasury bills of foreign countries. Gold Reserves: The physical gold held by the RBI as a part of India’s reserve assets. Special Drawing Rights (SDRs): SDRs are an international reserve asset created by the International Monetary Fund (IMF) and allocated to its member countries. SDRs can be exchanged for freely usable currencies to meet external financial needs. Reserve Position in the IMF (RTP): It is India’s quota contributions to the IMF, which can be withdrawn if needed.

Option (a), (c) and (d) are incorrect:

Foreign loans are not included in India’s official forex reserves. Loans from the World Bank are not part of foreign exchange reserves.