Question 1

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

Accepted Answer

The Foreign Exchange Management Act, 1999 (which replaced FERA, 1973) classifies foreign exchange transactions into two broad categories: Current Account and Capital Account. Capital Account transactions involve cross-border movement of capital and include Foreign Direct Investment (FDI), Foreign Institutional Investment (FII), external commercial borrowings, and loans. Current Account transactions, by contrast, relate to trade in goods and services, remittances, and income flows. The RBI enforces FEMA regulations and permits/restricts these transactions based on India's balance of payments position and policy objectives. Therefore, the answer is B.

Question 2

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

Accepted Answer

The Asian Infrastructure Investment Bank (AIIB) was established in 2016 with its headquarters located in Beijing, China. India is a founding member of AIIB and holds significant voting rights and shareholding in the institution. AIIB was created as an alternative multilateral development bank to finance infrastructure projects across Asia, complementing the role of the Asian Development Bank (ADB), which was established in 1966 with headquarters in Manila and where India is also a founding member. Both institutions are critical to India's participation in regional development financing. Therefore, the answer is B.

Question 3

Under the Foreign Exchange Management Act (FEMA) 1999, which of the following best describes the primary distinction between the current account and the capital account in India's Balance of Payments?

Accepted Answer

The current account records transactions in goods, services, income, and transfers (trade flows), while the capital account records investment flows such as Foreign Direct Investment (FDI), Foreign Institutional Investment (FII), external loans, and other financial assets. FEMA 1999, enforced by RBI, regulates both categories but with different liberalisation levels. Current account transactions are largely liberalised, whereas capital account transactions remain more restricted and require RBI approval in many cases. Therefore, the answer is B.

Question 4

SWIFT is a critical infrastructure for international banking. Which of the following correctly describes SWIFT's primary function in cross-border banking transactions?

Accepted Answer

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a secure messaging system used by financial institutions worldwide to transmit standardised payment instructions and financial information across borders. It does not itself transfer funds; rather, it facilitates the secure communication of transaction details between banks. SWIFT operates under a cooperative governance model and is headquartered in Brussels. Banks use SWIFT codes (BIC — Bank Identifier Code) to identify each other in international transactions. Therefore, the answer is C.

Question 5

The International Monetary Fund (IMF) has 190 member countries and uses a basket of currencies called SDR (Special Drawing Rights). Which of the following statements about SDR is correct?

Accepted Answer

The SDR is an international reserve asset created by the IMF in 1969. It is a basket of five major currencies: the US Dollar, Euro, Chinese Yuan (added in 2015), Japanese Yen, and British Pound Sterling. SDR is used as a unit of account by the IMF and can be exchanged for any of its constituent currencies. Countries hold SDRs as part of their foreign exchange reserves. The SDR allocation to member countries is based on their IMF quota. India holds SDR allocations as part of its official reserves. Therefore, the answer is B.

Question 6

The Asian Development Bank (ADB) was established in 1966 with headquarters in Manila. Which of the following statements about ADB and India's role is correct?

Accepted Answer

The Asian Development Bank (ADB) was founded in 1966 with its headquarters in Manila, Philippines. India is a founding member of ADB and is one of the largest borrowers from the bank. ADB focuses on infrastructure development, poverty reduction, and regional cooperation in Asia and the Pacific. India's membership and borrowing status reflect its significance in ADB's operations. The Asian Infrastructure Investment Bank (AIIB), established in 2016 with headquarters in Beijing, is a separate multilateral development bank where India is also a founding member. Therefore, the answer is A.

Question 7

Under FEMA 1999, which of the following correctly describes the scope of 'foreign exchange' as defined by the Act?

Accepted Answer

Under the Foreign Exchange Management Act (FEMA) 1999, 'foreign exchange' is defined as foreign currency and includes deposits, credits, and balances payable in foreign currency. It also encompasses foreign securities (shares, bonds, debentures issued outside India), foreign currency notes and coins, and any right to receive foreign currency. The definition is broad and covers not just currency but all claims to foreign currency. FEMA 1999 replaced the Foreign Exchange Regulation Act (FERA) 1973 and is enforced by the RBI. Therefore, the answer is D.

Question 8

Under the Foreign Exchange Management Act (FEMA), 1999, which of the following transactions is classified under the Capital Account?

Accepted Answer

The Capital Account under FEMA covers transactions involving cross-border movement of capital, including Foreign Direct Investment (FDI), Foreign Institutional Investment (FII), external commercial borrowings, and loans. These represent capital flows that change the ownership or financing structure of assets. In contrast, the Current Account covers trade in goods and services (exports/imports), income flows (dividends, interest), and transfers. Therefore, answer is B.

Question 9

SWIFT, the international messaging system used in banking, primarily serves which of the following functions?

Accepted Answer

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a secure messaging network that enables banks to exchange standardized financial information and instructions for international fund transfers, trade finance, and securities transactions. It does not directly transfer funds but facilitates secure communication and standardization of messages between financial institutions globally. Therefore, answer is C.

Question 10

India is a founding member of which of the following multilateral development institutions?

Accepted Answer

India is a founding member of the Asian Development Bank (ADB), established in 1966 with headquarters in Manila, Philippines. ADB was created to promote economic development and cooperation in Asia. India participated in ADB's establishment and remains one of its major borrowing members. The Asian Infrastructure Investment Bank (AIIB), while important, was established in 2016 with headquarters in Beijing and India is a member but not a founding member in the same sense as ADB. Therefore, answer is B.

Question 11

The Special Drawing Right (SDR) issued by the International Monetary Fund (IMF) is best described as which of the following?

Accepted Answer

The Special Drawing Right (SDR) is an international reserve asset created by the IMF in 1969. It is not a currency but a basket of major currencies (currently USD, EUR, CNY, JPY, GBP) that IMF member countries can use to supplement their official reserves. SDR allocation is based on each country's IMF quota. SDRs can be exchanged for freely usable currencies and serve as a unit of account for IMF transactions. Therefore, answer is D.

Question 12

Which of the following institutions is part of the World Bank Group and specializes in providing insurance and guarantees against non-commercial risks for foreign investments in developing countries?

Accepted Answer

The Multilateral Investment Guarantee Agency (MIGA) is a member of the World Bank Group established in 1988. MIGA provides political risk insurance and credit enhancement guarantees to foreign investors and lenders to protect against non-commercial risks such as currency transfer restrictions, expropriation, war, civil disturbance, and breach of contract by host governments. This encourages foreign direct investment in developing countries. Therefore, answer is C.

Question 13

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. Transactions exceeding this limit or falling outside permitted categories (such as remittance for prohibited purposes like gambling or purchase of lottery tickets) require explicit RBI approval. Option D correctly identifies that remittance for speculative purposes in foreign markets exceeds the LRS limit and requires approval. Therefore, answer is D.

Question 14

Under FEMA 1999, India's Balance of Payments (BoP) is structured into two main accounts. A persistent Current Account Deficit (CAD) of 2.5% of GDP, combined with volatile Foreign Portfolio Investment (FPI) inflows, creates pressure on the rupee. Which of the following best describes the RBI's sterilisation mechanism in this scenario?

Accepted Answer

Sterilisation of capital flows is an RBI monetary policy tool used to neutralise the impact of large foreign exchange inflows or outflows on the domestic money supply. When FPI inflows increase foreign exchange reserves (expanding monetary base), RBI conducts Open Market Operations (OMOs) — selling government securities to absorb excess liquidity — thereby preventing inflationary pressure while maintaining exchange rate stability. This is distinct from allowing capital flows to directly expand the money supply. The mechanism is governed under RBI's monetary policy framework and the Foreign Exchange Management Act 1999, which grants RBI authority over forex management and capital account transactions. Sterilisation does NOT involve direct intervention in forex markets (that is intervention, not sterilisation) nor does it restrict FPI flows themselves — it manages the monetary consequences of those flows.

Question 15

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

Accepted Answer

The Asian Infrastructure Investment Bank (AIIB) was established in 2016 with its headquarters in Beijing, China. India is a founding member of AIIB and holds the second-largest shareholding (approximately 8.4% as of recent data) after China. AIIB focuses on financing infrastructure projects in Asia and is complementary to the Asian Development Bank (ADB), which was established in 1966 with headquarters in Manila and of which India is also a founding member. Option C correctly identifies India as a founding member of AIIB with significant shareholding. Therefore, answer is C.

Question 16

India's voting rights and quota share in the International Monetary Fund (IMF) are determined by which of the following factors?

Accepted Answer

The IMF allocates quota shares to member countries based on a formula that considers economic size (GDP), openness to trade, economic variability, and international reserves. A country's voting power is directly proportional to its quota share: each member receives 250 basic votes plus one additional vote per SDR 100,000 of quota. India, as the world's fifth-largest economy and a founding IMF member, holds a significant quota share (currently approximately 2.75% of total IMF quotas as of recent data), which translates to substantial voting rights. Option A correctly identifies that quota allocation is based on economic size, trade openness, and other macroeconomic factors. Therefore, answer is A.

Question 17

Under the SWIFT system, which of the following statements regarding international fund transfers is INCORRECT?

Accepted Answer

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a secure messaging system used by banks worldwide to communicate payment instructions and financial information. SWIFT itself does NOT settle funds — it only transmits standardised messages (MT103 for fund transfers, MT202 for bank-to-bank transfers, etc.). Settlement occurs through correspondent banking relationships or clearing houses (e.g., CHIPS in the USA, EURO1 in Europe). Option D incorrectly states that SWIFT settles funds directly; SWIFT is a messaging platform, not a settlement system. Therefore, answer is D.

Question 18

An Indian exporter receives a payment of USD 500,000 from a US client via SWIFT. The exporter's bank in Mumbai credits the rupee equivalent to the exporter's account using the RBI Reference Rate for that day. However, the exporter disputes the conversion rate applied, claiming it was 2 paise per dollar lower than the actual RBI Reference Rate. Under FEMA 1999 and RBI guidelines on forex transactions, which statement correctly describes the exporter's recourse and the bank's obligation?

Accepted Answer

Under FEMA 1999 and RBI guidelines on forex transactions for current account purposes (trade in goods/services), banks are required to apply the RBI Reference Rate (or a rate not worse than the RBI Reference Rate plus a transparent markup) for converting foreign exchange received on behalf of customers. The RBI Reference Rate is published daily by RBI and is the benchmark for all current account forex conversions. If a bank applies a rate worse than the RBI Reference Rate without explicit customer consent and transparent disclosure, it violates RBI's Liberalised Remittance Scheme (LRS) and current account forex guidelines. The exporter has the right to lodge a complaint with the bank's Ombudsman or RBI's Banking Ombudsman (under the Banking Regulation Act 1949 and RBI Ombudsman Scheme 2023) if the bank fails to apply the correct rate or provide transparent justification for any markup. The bank cannot unilaterally apply a rate worse than RBI Reference Rate for current account transactions without explicit customer agreement and clear disclosure.

Question 19

Which of the following correctly describes the relationship between India's Balance of Payments (BoP) components and the sterilisation mechanism employed by RBI?

Accepted Answer

India's Balance of Payments comprises the Current Account (trade in goods, services, income, transfers) and the Capital Account (FDI, FII, external loans, changes in reserves). When large capital inflows occur (e.g., FII inflows during market rallies), they increase domestic money supply and can fuel inflation. RBI's sterilisation mechanism involves open market operations (OMOs) — selling government securities to absorb excess liquidity — thereby neutralising the monetary impact of capital flows without allowing the exchange rate to appreciate excessively. Option B correctly identifies that sterilisation involves OMOs to absorb liquidity from capital inflows. Therefore, answer is B.

Question 20

Under the Foreign Exchange Management Act (FEMA) 1999, which of the following transactions would be classified under the Capital Account of India's Balance of Payments?

Accepted Answer

The Capital Account comprises all transactions involving changes in ownership of foreign financial assets and liabilities. FDI (Foreign Direct Investment) is a capital account transaction because it represents a non-resident investor acquiring ownership stake in an Indian enterprise, thereby creating a long-term financial liability for India. FII (Foreign Institutional Investment) in securities and external commercial borrowings are also capital account items. In contrast, exports of goods and services, remittances, and income flows belong to the Current Account. Therefore, answer is A.

SBI PO Forex & International Banking

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60-Second Revision — Forex & International Banking