Repayment of public debt : means Government is returning the borrowed money back to institutions from which it had borrowed earlier. These funds can be used by banks to create new loans, or it may be mopped up by RBI through tightening of monetary policy. Hence it may be mild inflationary or not depending on the ongoing stance.

 

Borrowing from the public to finance a budget deficit & Borrowing from the banks to finance a budget deficit – in both the cases, a crowding out effect will happen, reducing the funds available for lending, thereby pushing up the cost of borrowing for private players. Hence, it can be mild inflationary.

 

However, Creation of new money to finance a budget deficit will lead to increase in High-Powered Money supply, pushing up Money-multiplier & hence resulting in multi-fold increase in money supply in the economy. This increased money supply would lead to hyperinflation like scenario observed in Post-WW1 Germany & in Zimbabwe recently. India also witnessed such inflation in 1980s.

Black money includes all funds earned through illegal activity and otherwise legal income that is not recorded for tax purposes. Black money proceeds are usually received in cash from underground economic activity and, as such, are not taxed.

 

Such money needs to be retained as cash or in some other form which cannot be easily detected like precious metals & stones. It can also be used for activities mentioned in Options A, B & C. However, the biggest concern & worry of Government of India is loss of revenue to Government due to tax evasion, as the magnitude of evasion can only be estimated, & not fully calculated.

Devaluation makes domestic currency cheaper as compared to foreign currency, resulting in decreased foreign value of domestic currency. So, statement 2 is not correct.

 

Trade Balance in simplest terms would mean - the difference between the value of a country's exports and the value of a country's imports for a given period. A country's trade balance is positive or favorable (meaning that it registers a surplus) if the value of exports exceeds the value of imports & vice-versa. Devaluation makes exports cheaper in foreign country, but imports costly in the domestic country. For trade balance to improve, value of exports has to significantly rise as compared to value of imports. Although devaluation is done to improve the trade balance, the difference between the value of imports and exports as well as the preference of people in both countries will determine the improvement or deterioration of the trade balance, and we cannot conclude that devaluation will necessarily improve trade balance. So, statement 3 is not correct.

Foreign Currency Convertible Bonds (FCCB) means a bond issued by an Indian company in foreign currency and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company, either in whole or in part. FCCBs represent a debt obligation of the corporate. Investors have the option to redeem; or to convert them into underlying local shares or global depository receipts. If investors prefer to hold the FCCBs until redemption date, the corporate has to redeem the FCCBs on redemption date. Dilution would take place as and when debt is converted into equity. Since these bonds are convertible in to equity shares over a period of time as provided in the instrument, therefore they are covered under FDI policy & counted towards FDI. [If they are redeemed they count as ECB & a debt obligation, only on converting into equity it is counted towards FDI]. So, 1 is correct.

 

FII with certain conditions - According to IMF and OECD definitions, the acquisition of at least ten percent of the ordinary shares or voting power in a public or private enterprise by non-resident investors makes it eligible to be categorized as foreign direct investment (FDI).In India, as per SEBI (FPI regulations), 2019, a particular FII is allowed to invest upto 10% of the paid up capital of a company, which implies that any investment above 10% will be construed as FDI. So, 2 is correct.

 

Global Depository Receipt (GDR) - Global Depository Receipts means any instrument issued in the form of depository receipt or certificate created by the oversees depository bank outside India and issued to non-resident investors against underlying shares or foreign currency convertible bonds of issuing company. GDRs are equity representing share-holders funds, foreign investment in the form of equity shares issued outside India by a Depository Bank, on behalf of an Indian company which is covered under the FDI policy. GDR proceeds are reckoned as Foreign Direct Investment. So, 3 is correct.

 

Non-resident external deposits - NRI investments that are repatriable are considered FDI while non-repatriable investments are considered domestic investment. So, 4 is not correct

 

Bond price & Bond Yield are inversely related. When Bond prices go up, Bond Yield falls & vice-versa. Factors having an impact on Bond price will ultimately have an impact on Bond yield as well. 3 major factors which affect Bond prices are – Inflation, Interest Rates (monetary policy) & Credit ratings.

 

Monetary policy of US Federal Reserve impacts Indian financial markets by way of imported inflation, increased/decreased money flow in the form of FDI & FII, as seen in post-CoVID scenario. So, Statement 1 is correct.

 

Actions of RBI directly affect Inflation & short-term interest rates, which have a bearing on Bond prices & hence Bond yield. So, Statement 2 is correct.

Statement 3 is correct as already mentioned.

The options are related to recent BR Act, 1949 amendment brought out in the form of The Banking Regulation (Amendment) Bill, 2020.

 

Urban Cooperative Banks (UCB) are under RBI’s supervision & regulation since the passage of The Banking Regulation (Amendment) Bill, 2020. So, Statement 1 is not correct.

 

The Reserve Bank has came out with draft guidelines allowing primary urban cooperative banks (UCBs) to augment capital through issuance of equity shares, preference shares and debt instruments.

 

• The UCBs, it said, could raise share capital by issue of equity to persons within their area of operation enrolled as members and also through additional equity shares to the existing members.

• The UCBs, as per the draft, will be permitted to raise Tier-I and Tier-II capital by issuing Perpetual Non-Cumulative Preference Shares (PNCPS), Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS).

• The UCBs will also be allowed to issue Perpetual Debt Instruments (PDI) which will be eligible to be included in Tier-I capital and Long Term Subordinated Bonds(LTSB) as Tier-II capital. So, Statement 2 is correct.

 

The Banking Regulation Act, 1949 regulates all banking firms in India. Passed as the Banking Companies Act 1949, it came into force from 16 March 1949 and changed to Banking Regulation Act 1949 from 1 March 1966. Initially, the law was applicable only to banking companies. But, the 1966 amendment made it applicable to cooperative banks and introduced other changes. In 2020 it was amended to bring the cooperative banks under the supervision of the Reserve Bank of India. So, Statement 3 is correct.

Two goods are substitutes if using more of good A replaces the use of good B. For example, if the price of coffee increases, the quantity demanded for tea (a substitute beverage) increases as consumers switch to a less expensive yet substitutable alternative. So, statement 1 is correct.     

 

Two goods are complementary if using more of good A requires the use of more good B. For example, if the price of coffee increases, the quantity demanded for coffee stir sticks drops as consumers are drinking less coffee and need to purchase fewer sticks. So, statement 2 is not correct.

An inferior good is an economic term that describes a good whose demand drops when people's incomes rise. These goods fall out of favor as incomes and the economy improve as consumers begin buying more costly substitutes instead. So, statement 3 is not correct.

Economic Recession is a macro-economic term that refers a significant decline in the general economic activity, typically when there is two consecutive quarters of economic decline.

During recession various fiscal and monetary policies are undertaken. The central bank reduces the interest rates to near zero to increase the liquidity. So, option (a) is not correct.

The government increases massive spending; Therefore option (b) is correct.

 

Increase in tax rates and reduction of public expenditure will decrease the liquidity and further restricts the economy of the region/country. Therefore, (c) and (d) are not correct.

Supreme Court in Jan 2020 hold that an employer cannot differentiate between contractual and permanent employees and ruled that casual workers are also entitled to social security benefits under the Employees’ Provident Funds and Miscellaneous Provisions Act and directed to bring all employees under the PF scheme and provide benefits. So, statement 1 and 2 are correct.

 

 

“All wages shall be paid in current coin or currency notes or by cheque or by crediting the wages in the bank account of the employee or by the electronic mode: Provided that the appropriate Government may, by notification, specify the industrial or other establishment, the employer of which shall pay to every person employed in such industrial or other establishment, the wages only by cheque or by crediting the wages in his bank account.” Here, “his” is the account of the worker and not the industry. So statement 3 is correct.

The Governor of the reserve Bank of India (RBI) is appointed by the Central government. Their names are cleared by Cabinet Committee on appointments. So, 1 is correct.

Section 7 of the RBI Act 1934, provides authority to the Central Government to give directions to the Central Bank in public interest from time-to-time with the consultation of the RBI governor. So, statement 2 is not correct.

The Governor of the RBI draws his power from the RBI Act.