Answer Sheet of 31-01-25
FRIDAY: FINANCE
HOW INDIA'S FOREIGN EXCHANGE IS MANAGED?
India's foreign exchange (forex) management is governed by the Reserve Bank of India under the Foreign Exchange Management Act (FEMA), 1999. The RBI regulates forex transactions, reserves, and exchange rates to ensure economic stability. Below are the key aspects of India's forex management:
1. Management of Foreign Exchange Reserves
The RBI manages India's foreign exchange reserves, which include:
Foreign currency assets (FCA): Held in major currencies like USD, EUR, GBP, and JPY.
Gold reserves: RBI holds gold as part of its forex reserves.
Special Drawing Rights (SDRs): International reserve assets allocated by the IMF.
Reserve Position in the IMF: India’s quota and borrowing rights in the IMF.
The reserves help stabilize the rupee, manage inflation, and meet external liabilities.
2. Exchange Rate Management
India follows a managed floating exchange rate system, where the market determines the rupee’s value, but the RBI intervenes to prevent extreme fluctuations. The methods include:
Buying/selling forex in the market: To control volatility.
Sterilization: Adjusting liquidity through bonds or monetary policy tools.
Foreign Exchange Intervention: RBI directly influences the rupee’s value.
3. Foreign Exchange Transactions and FEMA Regulations
All forex transactions in India are regulated under FEMA, 1999, which replaced FERA (Foreign Exchange Regulation Act, 1973).
FEMA liberalized foreign exchange regulations, allowing easier foreign investments and remittances while controlling illegal activities. Key points include:
Current Account Transactions: Trade in goods and services, education, medical expenses, etc., are mostly free.
Capital Account Transactions: Investments, loans, and transfers that affect assets and liabilities are regulated.
4. Foreign Exchange Market in India
The forex market in India includes:
Authorised Dealers (ADs): Banks and financial institutions licensed by RBI to trade forex.
Interbank Forex Market: Where banks trade foreign currencies among themselves.
Retail Forex Market: Where individuals and businesses exchange forex for travel, trade, or investment.
RBI monitors speculation and volatility in these markets.
5. Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)
India attracts forex through:
FDI (Foreign Direct Investment): Long-term investments in companies, factories, and assets.
FPI (Foreign Portfolio Investment): Investments in stocks and bonds.
External Commercial Borrowings (ECBs): Indian companies borrowing from foreign sources.
RBI and SEBI regulate these flows to prevent financial instability.
6. Remittances and Outflows
India is one of the largest recipients of remittances. The Liberalized Remittance Scheme (LRS) allows Indians to send up to $250,000 per year abroad for travel, education, or investments. However, large or suspicious transactions are monitored under FEMA and anti-money laundering laws.
7. Impact of Forex on the Indian Economy
Strong forex reserves stabilize the economy and credit ratings.
Exchange rate fluctuations affect inflation, trade balance, and economic growth.
Foreign capital flows impact stock markets and economic policies.
Conclusion
India's foreign exchange is managed through RBI interventions, FEMA regulations, forex markets, and international trade policies to ensure economic stability and growth.
Did You Know!
Superlative
Kuwait dinar is the world's most expensive currency
Capital
New Zealand- Wellington
Chile- SantiagoInvention
Electricity- Benjamin Franklin
Historical Coach
1) The battle of Haldighati was fought between?
The Battle of Haldighati was fought in 1576 between Maharana Pratap of Mewar and Emperor Akbar's forces, led by Man Singh I of Amber. The battle took place in the Haldighati pass in present-day Rajasthan.
Although the battle was fierce, it was not a decisive victory for either side. Maharana Pratap, though outnumbered, managed to escape, but he continued to fight for the independence of Mewar for many years afterward.
2) Who was the founder of Kakatiya dynasty?
Gundyana laid foundation for establishment of Kakatiya dynasty in 9th Century.
3) Who was the first woman president of Indian National Congress?
Annie Besant president of INC in the year 1917 and she is also a member in Theosophical Society (Divyagnan Samaj)
Banking Coach
1) IFSC- Indian Financial System Code
It is an alphanumeric code used to uniquely identify a bank branch for electronic payment applications like Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), Immediate Payment Service (IMPS) in India.
The IFSC code is used to route the messages to the respective bank branch during fund transfers. It typically consists of 11 characters, where:
The first four characters represent the bank code.
The fifth character is always "0" (zero), reserved for future use.
The last six characters represent the branch code.
2) RBI was established by the suggestions of which commission?
The Reserve Bank of India (RBI) was established on the basis of the recommendations of the Royal Commission on Indian Currency and Finance, also known as the Hilton Young Commission. The commission was established in 1926.
3) What is Bancassurance?
Bancassurance is a partnership between a bank and an insurance company, where the bank sells insurance products to its customers. This model allows customers to purchase various types of insurance, such as life, health, or general insurance, directly through their bank.
In bancassurance, the bank acts as a distributor for the insurance company's products.
4) NISM - It stands for National Institute of Securities Markets. It is an educational and training institute established by the Securities and Exchange Board of India (SEBI). NISM's primary aim is to enhance the quality of the securities markets by providing various certification programs, training, and research.
Reasoning Coach
1) The average age of 10 students is 30 if the teacher added the average goes to 32. What is the age of teacher?
Average age* No of persons
Case 1- 10*30=300
Case 2- 11*32=352
Age of the teacher= 352-380=52 years
2) What is the compound interest for 2 years and the principle ₹56000 with an annual interest of 4%.
Formula
F= P (1+r/100)t
= 56000 (1+0.04)2
= 56000( 1.04)2
=56000 (1.08)
= 60480
Interest = 60480-56000
=4480
3) The sum of three consecutive numbers is 45. what are the numbers?
Let the three consecutive numbers be:
First number: x-1
Second number: x
Third number: x+1
According to the problem, the sum of these three numbers is 45:
x + (x + 1) + (x + 2) = 45
Simplifying the equation:
3x + 3 = 45
Now, solve for :
3x = 45 - 3
3x = 42 ]
x = 14
So, the three consecutive numbers are:
14, 15, 16
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