Question 1

The International Monetary Fund (IMF) allocates Special Drawing Rights (SDR) to member countries based on which primary criterion?

Accepted Answer

The IMF allocates SDR to member countries primarily based on their quota in the IMF. A country's quota is determined by its economic size, typically measured by GDP, trade volume, and other economic indicators. The quota determines both the country's voting power and its SDR allocation. India, as the world's fifth-largest economy and a founding member of the IMF (1945), has a significant quota and corresponding SDR allocation. SDR allocation is NOT based on currency reserves, debt levels, or population. Therefore, answer is B.

Question 2

Which of the following is a member institution of the World Bank Group that specifically provides investment insurance and guarantees to protect foreign investors against non-commercial risks in developing countries?

Accepted Answer

The World Bank Group comprises five institutions: IBRD (International Bank for Reconstruction and Development), IDA (International Development Association), IFC (International Finance Corporation), MIGA (Multilateral Investment Guarantee Agency), and ICSID (International Centre for Settlement of Investment Disputes). MIGA specifically provides political risk insurance and investment guarantees to foreign investors undertaking projects in developing member countries. These guarantees protect against risks such as expropriation, currency inconvertibility, war, civil disturbance, and breach of contract by the host government. Therefore, answer is C.

Question 3

The Asian Infrastructure Investment Bank (AIIB) was established in 2016 with headquarters in which city, and India holds what status in this institution?

Accepted Answer

The Asian Infrastructure Investment Bank (AIIB) was established in 2016 with headquarters in Beijing, China. AIIB is a multilateral development bank focused on financing infrastructure projects in Asia. India is a founding member of AIIB and holds the second-largest shareholding after China, reflecting India's significant role in Asian infrastructure development. As a founding member, India has substantial voting rights and influence in AIIB's governance. Therefore, answer is B.

Question 4

The International Monetary Fund (IMF) allocates Special Drawing Rights (SDR) to member countries primarily to serve which purpose?

Accepted Answer

SDR (Special Drawing Rights) is an international reserve asset created by the IMF to supplement member countries' official reserves. SDRs can be used to settle balance of payments deficits, support currency stabilization, and provide liquidity during financial crises. The SDR is valued as a basket of five major currencies (US Dollar, Euro, Chinese Yuan, Japanese Yen, and British Pound). India, as an IMF member with a quota-based allocation, receives SDR allocations and can use them to address external payment pressures. Therefore, answer is A.

Question 5

The Asian Infrastructure Investment Bank (AIIB), established in 2016 with headquarters in Beijing, primarily focuses on which of the following objectives?

Accepted Answer

AIIB is a multilateral development bank established in 2016 to finance infrastructure projects in Asia — including transportation, energy, water, and telecommunications. India is a founding member and significant shareholder of AIIB. AIIB complements the Asian Development Bank (ADB, established 1966, HQ Manila) and the World Bank. AIIB's mandate is to promote sustainable economic development and regional cooperation through infrastructure financing. Therefore, answer is B.

Question 6

Under FEMA 1999, which of the following statements correctly describes the regulatory authority and enforcement mechanism for foreign exchange transactions in India?

Accepted Answer

The Foreign Exchange Management Act (FEMA) 1999 replaced the Foreign Exchange Regulation Act (FERA) 1973. FEMA is enforced by the Reserve Bank of India (RBI), which has the authority to issue regulations, guidelines, and directions for managing foreign exchange transactions. The Ministry of External Affairs and Ministry of Finance provide policy oversight, but RBI is the primary enforcement authority. FEMA applies to all persons in India and to Indian residents abroad regarding foreign exchange dealings. Therefore, answer is D.

Question 7

Under the Foreign Exchange Management Act (FEMA), 1999, which of the following transactions is classified as a 'Current Account' transaction?

Accepted Answer

Current Account transactions under FEMA 1999 relate to trade in goods, services, income, and transfers across borders. The export of merchandise and payment for services rendered abroad are classic Current Account items. Capital Account transactions, by contrast, involve cross-border movement of capital such as FDI, FII, external commercial borrowings, and loans. FEMA Section 6 distinguishes between these two categories. Option A (export of goods) is a Current Account transaction because it involves the sale of tangible goods internationally. Option C (FDI inflow) and Option D (external commercial borrowing) are Capital Account transactions involving capital movement, not trade in goods/services. Therefore, answer is A.

Question 8

The Asian Infrastructure Investment Bank (AIIB) was established in 2016 with its headquarters located in which city, and India holds which status in this multilateral development bank?

Accepted Answer

The Asian Infrastructure Investment Bank (AIIB) was officially established in 2016 with its headquarters in Beijing, China. India is a founding member of AIIB, having signed the Articles of Agreement in 2014 and ratified them in 2015, making it one of the original member states at the bank's inception. This distinguishes India's role from being a 'member state' (which all participating countries are) or a 'shareholder' (which is too generic). As a founding member, India participated in the bank's establishment and governance structure from inception. Option B incorrectly places the headquarters in Manila (which is the headquarters of the Asian Development Bank, established in 1966). Option C incorrectly states India as a 'member state' without the founding status distinction. Option D incorrectly identifies Tokyo as the headquarters. Therefore, answer is A.

Question 9

Under the Foreign Exchange Management Act (FEMA) 1999, which of the following best describes the primary distinction between Current Account transactions and Capital Account transactions in India's Balance of Payments?

Accepted Answer

Current Account transactions involve the exchange of goods, services, income, and transfers across borders — essentially trade and remittances. Capital Account transactions involve cross-border movement of financial assets such as Foreign Direct Investment (FDI), Foreign Institutional Investment (FII), external loans, and portfolio investments. FEMA 1999, enforced by RBI, regulates both categories but with different permission frameworks. Current Account convertibility is permitted; Capital Account convertibility remains restricted and regulated. Therefore, answer is B.

Question 10

SWIFT (Society for Worldwide Interbank Financial Telecommunication) serves which primary function in international banking operations?

Accepted Answer

SWIFT is a secure messaging system used by banks and financial institutions worldwide to communicate and execute international fund transfers, trade finance instructions, and other financial transactions. It does not hold funds itself — it is purely a messaging and communication infrastructure. SWIFT enables standardized, secure transmission of payment instructions between banks across borders. It is distinct from payment settlement systems (like CHIPS or Fedwire in the US). Therefore, answer is C.

Question 11

Under the Foreign Exchange Management Act (FEMA), 1999, which of the following is NOT a permitted current account transaction?

Accepted Answer

FEMA 1999 replaced FERA 1973 and is enforced by RBI. Current account transactions include trade in goods, services, income flows, and transfers. However, capital account transactions—such as Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), external commercial borrowings, and loans—are NOT current account transactions. They fall under capital account and require separate RBI approval under Schedule III of FEMA. Option D (external commercial borrowing) is a capital account item, not a current account transaction. Therefore, answer is D.

Question 12

SWIFT (Society for Worldwide Interbank Financial Telecommunication) primarily serves which function in international banking?

Accepted Answer

SWIFT is a secure messaging system used by financial institutions worldwide to communicate payment instructions and settlement information across borders. It does NOT process payments directly—it only transmits standardized messages (MT messages) between banks. SWIFT enables banks to exchange information securely, but the actual settlement of funds occurs through correspondent banking relationships or clearing houses. Option A correctly identifies SWIFT's primary function as a secure messaging and communication platform. Therefore, answer is A.

Question 13

The Asian Infrastructure Investment Bank (AIIB) was established in 2016 with headquarters in Beijing. Which of the following statements accurately describes India's role and the AIIB's relationship to the World Bank?

Accepted Answer

The Asian Infrastructure Investment Bank (AIIB) was established in 2016 with headquarters in Beijing. India is a founding member of AIIB and one of its largest shareholders (second only to China). AIIB is a multilateral development bank focused on financing infrastructure projects in Asia. While AIIB complements the World Bank and Asian Development Bank (ADB), it is a separate institution with its own governance structure, lending policies, and operational framework. AIIB is not a subsidiary or replacement of the World Bank; rather, it operates alongside the World Bank and ADB as part of the global development finance architecture. Option C correctly identifies that India is a founding member of AIIB and that AIIB is a separate multilateral development bank complementing (not replacing) the World Bank. Therefore, answer is C.

Question 14

Under FEMA 1999, India's Balance of Payments is monitored through two main accounts. A persistent Current Account Deficit (CAD) relative to GDP can signal structural trade imbalances. Which of the following best describes the primary distinction between the Current Account and Capital Account in BoP accounting?

Accepted Answer

The Current Account records all transactions related to trade in goods, services, income (remittances, investment income), and unilateral transfers. The Capital Account records financial flows including Foreign Direct Investment (FDI), Foreign Portfolio Investment (FII), external borrowing, and changes in foreign exchange reserves. A Current Account Deficit means India imports more goods/services than it exports; a Capital Account surplus means foreign investment inflows exceed outflows. RBI monitors both under FEMA 1999 to manage external stability. The trap here is that candidates often confuse 'capital' with 'money' and think the Capital Account is about cash transactions, when it is actually about financial assets and liabilities. Therefore, answer is C.

Question 15

Under FEMA 1999, which of the following transactions would require prior RBI approval under the Liberalised Remittance Scheme (LRS)?

Accepted Answer

The Liberalised Remittance Scheme (LRS), notified by RBI under FEMA 1999, permits resident individuals to remit up to USD 250,000 per financial year for permitted current or capital account transactions without requiring prior RBI approval — only self-declaration to the Authorised Dealer bank is needed. Remittances beyond this limit or for purposes outside the permitted list (such as purchase of immovable property abroad for commercial purposes, or investment in foreign companies for business control) require explicit RBI approval. Option B correctly identifies a transaction requiring approval. Option A (education abroad) and Option C (medical treatment) are within the LRS permitted list up to USD 250,000. Option D (gifts to relatives) is also permitted under LRS without additional approval. Therefore, answer is B.

Question 16

In the context of India's Balance of Payments (BoP), a persistent Current Account Deficit (CAD) is typically addressed by RBI through sterilisation. Which of the following best describes the mechanism of sterilisation in this context?

Accepted Answer

Sterilisation is an RBI monetary policy tool used to neutralise the impact of capital inflows (or outflows) on the domestic money supply without allowing the exchange rate to appreciate (or depreciate) excessively. When foreign capital flows in, RBI purchases foreign exchange to prevent rupee appreciation, which would increase domestic liquidity. To sterilise this liquidity injection, RBI sells government securities (OMOs — Open Market Operations) or increases the Cash Reserve Ratio (CRR), thereby absorbing the excess rupees from the banking system. This keeps the money supply and inflation under control while maintaining exchange rate stability. Option B correctly describes this dual mechanism: RBI purchases forex (to prevent rupee appreciation) and simultaneously sells securities (to absorb liquidity). Option A incorrectly suggests RBI sells forex, which would worsen CAD. Option C confuses sterilisation with direct interest rate hikes. Option D misidentifies the purpose as directly reducing CAD rather than managing its monetary consequences. Therefore, answer is B.

Question 17

The Asian Infrastructure Investment Bank (AIIB) was established in 2016 with its headquarters in Beijing. Which of the following statements about AIIB's relationship with India is INCORRECT?

Accepted Answer

AIIB was established in 2016 with headquarters in Beijing and is a multilateral development bank focused on financing infrastructure projects in Asia. India is a founding member of AIIB and holds the second-largest shareholding after China. India is also a member of the Asian Development Bank (ADB), which was established in 1966 with headquarters in Manila, and India is a founding member of ADB as well. The statement that India is NOT a founding member of AIIB is factually incorrect — India was indeed a founding member and is one of the largest shareholders. Option D correctly identifies this as the incorrect statement. Options A, B, and C are all factually accurate: AIIB was established in 2016, its headquarters is in Beijing, and India holds significant shareholding as a founding member. Therefore, answer is D.

Question 18

Under FEMA 1999, the distinction between Current Account transactions and Capital Account transactions is fundamental to India's forex regime. Which of the following transactions would be classified as a Capital Account transaction?

Accepted Answer

Under FEMA 1999 and India's Balance of Payments framework, transactions are classified as either Current Account or Capital Account. Current Account transactions involve trade in goods and services (exports, imports, remittances, insurance, tourism, etc.). Capital Account transactions involve movement of capital — such as Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), external commercial borrowing (ECB), loans, and equity investments. Option C (Foreign Direct Investment by a foreign company in an Indian manufacturing unit) is a Capital Account transaction because it represents capital inflow and ownership stake. Option A (export of software services) is a Current Account transaction (services). Option B (remittance by an NRI to family in India) is a Current Account transaction (current transfers). Option D (payment for imported goods) is a Current Account transaction (goods). Therefore, answer is C.

Question 19

The International Monetary Fund (IMF) uses the Special Drawing Right (SDR) as its unit of account and a reserve asset. As of recent IMF data, which of the following statements about SDR composition is CORRECT?

Accepted Answer

The SDR (Special Drawing Right) is an international reserve asset created by the IMF in 1969. Its value is based on a basket of five major currencies: the US Dollar (USD), Euro (EUR), Chinese Yuan (CNY), Japanese Yen (JPY), and British Pound (GBP). The SDR basket is reviewed every five years; the most recent review (effective August 2022) confirmed these five currencies with updated weightings. The USD has the largest weight (approximately 41.73%), followed by EUR (approximately 30.93%), CNY (approximately 10.92%), JPY (approximately 9.33%), and GBP (approximately 8.09%). Option A correctly identifies that the SDR basket includes five currencies including the Chinese Yuan. Option B incorrectly suggests the SDR basket includes the Indian Rupee — the Rupee is not part of the SDR basket despite India's large economy and IMF membership. Option C incorrectly states the SDR is pegged to gold — the SDR is a fiat currency basket, not gold-backed. Option D incorrectly claims the SDR basket is reviewed annually — it is reviewed every five years. Therefore, answer is A.

Question 20

Under FEMA 1999, which of the following transactions would require prior RBI approval for a resident individual to remit funds abroad?

Accepted Answer

FEMA 1999 (Foreign Exchange Management Act) replaced FERA 1973 and is enforced by RBI. For resident individuals, the Liberalised Remittance Scheme (LRS) permits remittance of up to USD 250,000 per financial year for permitted current or capital account transactions without prior RBI approval. However, remittances for purposes not covered under LRS (such as investment in foreign real estate, acquisition of immovable property abroad, or speculative transactions) require explicit RBI approval. Option D (investment in foreign real estate) falls outside the automatic LRS window and mandates prior approval. Therefore, answer is D.

IBPS PO Forex & International Banking

Forex & International Banking— Rules & Concept

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Forex & International Banking — Practice Questions

60-Second Revision — Forex & International Banking