UPSC Prelims 2022 Analysis

Explanation

The responsibility for maintaining price stability and controlling inflation in India lies primarily with the Reserve Bank of India (RBI).

The RBI formulates and implements monetary policy to maintain price stability and ensure adequate flow of credit to productive sectors of the economy.

As the central bank of the country, the RBI uses various tools such as repo rate, reverse repo rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR) to influence liquidity and interest rates in the economy, thereby affecting inflationary pressures.

Explanation

Tight monetary policy is an action taken by a central bank, such as the Federal Reserve, to curb overheated economic growth. Central banks employ tight monetary policy when an economy is experiencing rapid acceleration or when inflation, which pertains to overall prices, is escalating too swiftly.

Statement 1 is correct. Central banks implement monetary policies to maintain stability and positive trends in inflation, unemployment, and economic growth. In instances of economic overheating, central banks raise interest rates and implement other contractionary measures to decelerate the pace. This can discourage investments and lower asset prices. Consequently, the tight monetary policy of the US Federal Reserve might induce capital flight among investors.

Statement 2 is correct. Capital flight can elevate interest costs due to the reduction in the money supply within the system. As a result, this would contribute to an increase in the interest expenses for firms that have engaged in external commercial borrowings.

Statement 3 is incorrect. The devaluation of the domestic currency does not impact External Commercial Borrowings since they are denominated in foreign currency, rather than the domestic currency.

NOTE: The given question was dropped by UPSC from the Official Answer Key.

Explanation

In India, the primary agency responsible for compiling information on industrial disputes, closures, retrenchments, and lay-offs in factories employing workers is the Labour Bureau

The Labour Bureau is an attached office of the Ministry of Labour and Employment, Government of India. It plays a crucial role in collecting, compiling, and disseminating labor statistics across various aspects, including industrial relations.

Explanation

Statement 1 is correct. Acquiring new technology - This is a capital expenditure. When a company acquires new technology (like software, machinery, or equipment), it's considered an investment that will benefit the organization for several years. The cost is added to the company's asset base and depreciated over its useful life.

Statement 2 is incorrect. Debt vs. Equity Financing - The way a company finances its expenditures (debt or equity) doesn't determine whether it's a capital or revenue expenditure. The nature of the expense itself matters more.

Explanation

A convertible bond is a type of debt security that provides an investor with a right or an obligation to exchange the bond for a predetermined number of shares in the issuing company at certain times of a bond's lifetime. It is a hybrid security that possesses features of both debt and equity.

Statement 1 is correct Convertible bonds tend to offer a lower coupon rate or rate of return in exchange for the value of the option to convert the bond into a common stock. Investors will generally accept a lower coupon rate on a convertible bond, compared with the coupon rate on an otherwise identical regular bond, because of its conversion feature. This enables the issuer to save on interest expenses, which can be substantial in the case of a large bond issue.

Statement 2 is correct The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices as equity prices can differ widely from the given interest and the difference in that can be used as a hedge for inflation.

Explanation

Statement 1 is incorrect: BBB was set up in February 2016 as an autonomous body based on the recommendations of the RBI-appointed Nayak Committee. It was part of the Indradhanush Plan aimed at revamping public sector banks (PSBs). The Ministry of Finance takes the final decision on the appointments in consultation with the Prime Minister's Office.

Statement 2 is correct: It makes recommendations for the appointment of whole-time directors as well as non-executive chairpersons of Public Sector Banks (PSBs) and state-owned financial institutions.

Statement 3 is correct: Assisting banks with the strategies to deal with issues of bad loans or stressed assets is the agenda of BBB.

Note: The Banks Board Bureau (BBB) was abolished and replaced by the Financial Services Institutions Bureau (FSIB) in 2022. The FSIB is an autonomous body of the Government of India.

Explanation

Household savings and government borrowings: A portion of household financial savings in India does indeed go towards government borrowings

Government Debt Instruments: The government raises funds through various debt instruments like bonds and treasury bills. These instruments offer a return on investment to individuals who purchase them. Savings and Investments: When households save money, they might invest it in these government debt instruments through banks or other financial institutions. This provides a source of funding for the government while offering a return to the investors (savers).

Dated securities and internal debt: Dated securities are a major component of India's internal debt. These are essentially government bonds issued at market-determined interest rates through auctions. Investors, including households, banks, and financial institutions, can participate in these auctions and purchase dated securities.

Hence, both statements are correct.

Explanation

The nominal Effective Exchange Rate (NEER) is a measure of the value of a country's currency against a basket of other currencies weighted by their importance in trade. If NEER increases, it means that the value of the currency has increased relative to the currencies in the basket, indicating appreciation. Hence, statement 1 is correct.

The Real Effective Exchange Rate (REER) takes into account both nominal exchange rates and relative price levels (inflation) between countries. An increase in REER means that the country's currency is overvalued relative to its trading partners, which can reduce trade competitiveness. Hence, statement 2 is incorrect.

If domestic inflation is higher than inflation in other countries, the real value of the domestic currency decreases faster than the nominal value, causing a divergence between NEER and REER.

Therefore, the correct statements are 1 and 3.

Explanation

Both Rapid Financing Instrument (RFI) and Rapid Credit Facility (RCF) are lending facilities offered by the International Monetary Fund (IMF) to member countries facing urgent balance of payments needs.

Rapid Financing Instrument (RFI) This is available to all IMF member countries.

Rapid Credit Facility (RCF) This is a concessional lending facility specifically for low-income countries (LICs) that are members of the Poverty Reduction and Growth Trust (PRGT).

Explanation

The Coal Controller's Organisation (CCO) is a subordinate office of the Ministry of Coal, having its headquarters at Kolkata and field offices at Dhanbad, Ranchi, Bilaspur, Nagpur, Sambalpur, Kothagudem and Asansol. It collects and maintains coal production data of all private and public sector coal mines in the country. The information is collected every month.

Statement 1 is correct. Under the Collection of Statistics Act, 2008 Coal Controller has been made the statistical authority concerning coal and lignite statistics. Entrusted with the responsibility of carrying out the Annual Coal & Lignite survey and publishing of Provisional Coal Statistics and Coal Directory of India.

Statement 2 is correct. It is entrusted with the task of monitoring captive mines. Work such as permission for the opening and reopening of coal mines has been entrusted to the CCO.

Statement 3 is correct. Under the Coal Bearing Area (Acquisition and Development) Act, 1957- the Coal Controller is the competent authority under this act to hear any objection to the Central Government's Notification relating to the acquisition of coal-bearing land and to furnish his reports to the Central Govt.

Statement 4 is incorrect. Ensuring that coal mining companies deliver the coal to end users in the prescribed time is not the function of the Coal Controller's Organization (CCO).

Explanation

Statement 1 is incorrect. Typically, the RBI uses open market operations to sell government securities to drain money from the system and control inflation. Buying government securities would inject money into the system, potentially fueling inflation further.

Statement 2 is correct. Selling dollars in the market - If the rupee is rapidly depreciating, the RBI might intervene in the foreign exchange market by selling dollars from its reserves. This increased supply of dollars in the market can help stabilize the exchange rate and slow down the depreciation of the rupee.

Statement 3 is correct. A fall in interest rates in the USA or EU could lead to capital outflows from India as investors seek higher returns elsewhere. This outflow can put downward pressure on the rupee. To counter this, the RBI might intervene by buying dollars (absorbing some of the outflows).

Explanation

Indirect Transfers: This refers to a situation where a foreign company transfers ownership of assets located in India, but not directly. Instead, they might transfer shares of a subsidiary company that holds the Indian assets.

Taxation on Underlying Assets: The Indian government aims to tax the transfer of assets with substantial value in India, even if the transaction happens offshore. Indirect transfer provisions ensure that the foreign company pays capital gains tax on the underlying Indian assets.

Explanation

The real sector of the economy includes

Farmers harvesting their crops This is a primary sector activity where raw materials are produced. Agriculture forms a crucial part of the real sector.

Textile mills converting raw cotton into fabrics This is a secondary sector activity where raw materials are processed into finished goods. Manufacturing industries are considered part of the real sector.

The other two options are part of the financial sector

Commercial bank lending money (Financial sector) Banks and other financial institutions provide financial services like lending, borrowing, and investing. These activities facilitate transactions in the real sector but don't directly produce goods or services themselves.

Issuing rupee-denominated bonds overseas (Financial sector) This is a financial instrument where a company raises funds by issuing bonds. While it can indirectly support real sector activities by providing capital, it's not directly involved in production.

Therefore, the correct code is 1 and 2 only.

Explanation

Inflation-indexed bonds (IIBs) typically offer a fixed real rate of return above inflation. Therefore, the coupon rates on IIBs are adjusted based on changes in inflation to maintain the real rate of return. Hence, statement 1 is correct.

Inflation-indexed bonds (IIBs) provide investors with protection against inflation because their principal and interest payments are adjusted based on changes in the inflation rate. This helps investors preserve their purchasing power. Hence, statement 2 is correct.

Tax exemption Currently, the interest income on IIBs is taxable in India. Capital gains tax treatment on IIBs might depend on the specific holding period and type of investor. Hence, statement 3 is incorrect.

Explanation

Statement 1 is incorrect. Credit Rating Agencies (CRA) analyse a debtor's ability to repay the debt and also rate their credit risk. All the credit rating agencies in India are regulated by SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992. There are a total of six credit agencies in India viz, CRISIL, CARE, ICRA, SMREA, Brickwork Rating, and India Rating and Research Pvt. Ltd.

Statement 2 is correct. ICRA Limited is a public limited company that was set up in 1991 in Gurugram. The company was formerly known as Investment Information and Credit Rating Agency of India Limited.

Statement 3 is correct. Brickwork Ratings is recognized as an external credit assessment agency (ECAI) by the Reserve Bank of India (RBI) to carry out credit ratings in India. Brickwork Rating was established in 2007 and is promoted by Canara Bank. It offers ratings for bank loans, SMEs, corporate governance ratings, municipal corporations, capital market instruments, and financial institutions.

Explanation

Foreign e-commerce companies cannot directly sell their own goods through an inventory-based model in India. This is to ensure a level playing field for domestic sellers and protect small retailers.

Marketplace model allows these companies to operate as online marketplaces, providing a platform for other sellers to list and sell their products.

There are no direct limitations on the size of sellers, the Foreign Direct Investment (FDI) rules in India restrict foreign multi-brand retailers (those selling a variety of brands) from owning inventory or controlling the sale of products on their platforms. This indirectly limits their influence on big sellers.

Therefore, both the statement are incorrect.