UPSC Prelims 2022 - General Studies (Paper I)

Explanation

The Rapid Financing Instrument (RFI) provides rapid financial assistance to all member countries that are facing a balance of payments crisis. The RFI was a part of a broader reform to make the IMF’s financial support more flexible and also to address the diverse needs of member countries. It replaced the IMF’s previous emergency assistance policy. Rapid Credit Facility (RCF) z z The Rapid Credit Facility (RCF) gives rapid concessional financial assistance generally to low-income countries facing a balance of payments crisis with no ex- post conditionality and where a full- fledged economic program is neither necessary nor feasible. z z The RCF was created under the Poverty Reduction and Growth Trust (PRGT) as part of a reform to make the Fund’s financial support more flexible and better tailored to the diverse needs of LICs, including in times of crisis. There are three windows under RCF: (i) A “regular window” for urgent BoP needs to be caused due to a wide range of sources including domestic instability, emergencies and fragility. (ii) An “exogenous shock window” for urgent BoP needs to be caused by a sudden, exogenous shock. (iii) A “large natural disaster window” for urgent BoP needs arising from natural disasters where damage is assessed to be equivalent to or exceeding 20 % of the member’s GDP.

Explanation

Statement 1 is correct: NEER is a measure of the value of a currency against the weighted average of a basket of foreign currency. An increase in NEER indicates an appreciation of the rupee. Statement 2 is incorrect: An increase in REER means exports are now more expensive and imports become cheaper. Thus, such an increase in value indicates a loss in trade competitiveness. Statement 3 is correct: NEER is the weighted geometric average of the bilateral nominal exchange rates of home currency in terms of foreign currencies. The REER is the weighted average where inflation is adjusted in its calculation, unlike NEER. Thus, an increase in inflation can lead to divergence between the value of REER and NEER.

Explanation

Statement 1 is incorrect: If inflation is too high, the RBI tries to decrease the liquidity of the market, by selling Government securities to the public via open market operation. Statement 2 is correct: Rupee depreciation means, a decrease in the value of the rupee with respect to the dollar. In free-floating exchange rate regime, depreciation takes place when the demand for the dollar is more than the supply. RBI is likely to sell dollars in the economy to increase the supply of the dollar. Statement 3 is correct: If the interest rate in the US and EU falls, there will be an inflow of dollars in the Indian market, leading to the appreciation of the rupee. To reduce the supply of excess dollars in the economy, RBI will likely to buy these dollars from the market.

Explanation

Statement 1 is correct: This Initiative is endorsed by G20 together with Paris Club. Statement 2 is correct: This is an initiative to support low-income countries with unsustainable debt. Paris Club: This is an informal group of official creditors whose role is to find sustainable solutions to the payment difficulties experienced by debtor countries. As debtor countries undertake reforms to stabilize and restore their macroeconomic situation, Paris Club creditors provide an appropriate debt treatment which is in the form of rescheduling, postponement or, concessional rescheduling, reduction in debt service obligations during a defined period (flow treatment) or as of a set date (stock treatment). The history of origin of the Paris Club dates back to the year 1956 when Argentina agreed to meet its public creditors in Paris.

Explanation

Statement 1 is correct: The inflation component on principal will not be paid with an interest but the same would be adjusted in the principal amount by multiplying it with the index ratio (IR). During the time of redemption, the adjusted principal or the face, whichever is higher, would be paid. Statement 2 is correct: Interest rate will be protected against inflation by paying a fixed coupon rate on the principal adjusted against inflation Statement 3 is incorrect: There is no such provision.