Consider the following statements: 1. Tight monetary policy of US Federal Reserve could lead to capital flight. 2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs). 3. Devaluation of domestic currency decreases the currency risk associated with ECBs. Which of the statements given above are correct?

The correct answer is C, 1 and 3 only. Statement 1 is right because the NEER is a trade weighted index of the rupee against a basket of partner currencies, so a rise in the index means the rupee has appreciated in nominal terms. Statement 3 is right because the REER adjusts the NEER for relative prices, so when domestic inflation runs faster than inflation abroad the two indices move apart. Statement 2 is wrong, and this is why options A, B and D fail: a rise in the REER means the rupee has become expensive in real terms, which makes Indian goods dearer abroad and weakens, not improves, trade competitiveness. Option A is wrong because it accepts statement 2 and leaves out the correct statement 3, option B is wrong because it accepts statement 2 and drops the correct statement 1, and option D is wrong because it accepts all three including the faulty second one.

The correct answer is B, inconsistent regulatory environment. Foreign investors bring in foreign exchange and look for predictable rules, and the difficulty most often listed for India is regulatory uncertainty: changing rules, clearances spread across departments and states, and disputes that take long to settle. Option A is wrong because competition from other foreign firms is a normal feature of any open market and is not a barrier that keeps investment out; investors come precisely to compete. Option C is wrong because India offers a large pool of engineers, managers and low cost workers and is usually described as strong on labour supply even where specific skills are short. Option D is wrong because a very large domestic consumer market is one of the main attractions that draws foreign direct investment to India, not a challenge. Remember that stable and simple rules are counted as the chief attraction for investment inflows.

The correct answer is A, the Foreign Exchange Regulation Act of 1973. FERA treated foreign exchange as a scarce resource, forbade most dealings unless permitted and made breaches criminal offences. It suited a closed economy and became unworkable after 1991, so Parliament passed the Foreign Exchange Management Act in 1999, which came into force in 2000, permits dealings unless restricted and treats breaches as civil matters. Option B is wrong because the Banking Regulation Act of 1949 governs the licensing and supervision of banks. Option C is wrong because the MRTP Act of 1969 dealt with monopolies and restrictive trade practices and was itself replaced by the Competition Act of 2002. Option D is wrong because the SEBI Act of 1992 gave statutory powers to the securities market regulator. Keep the pair FERA 1973 and FEMA 1999 ready, along with the fact that the Reserve Bank administers FEMA.

The correct answer is C, 1994. India accepted the obligations of Article VIII of the Articles of Agreement of the International Monetary Fund in August 1994, which means the rupee can be exchanged freely for trade in goods and services, travel, education, remittances and interest payments. Option A is wrong because 1991 is the year of the balance of payments crisis and of the two step devaluation of the rupee in July, the beginning rather than the completion of the reform. Option B is wrong because March 1993 is when the dual rate of the Liberalised Exchange Rate Management System was unified into a single market determined rate, one step before convertibility. Option D is wrong because 1999 is the year FEMA was enacted. The capital account is still only partly convertible, which is the distinction papers test along with these dates.

The correct answer is D, small savings collected by the government. Small savings such as deposits in post office schemes are domestic rupee liabilities of the government and have nothing to do with the country's external assets. India's foreign exchange reserves, held and managed by the Reserve Bank, have exactly four components. Option A is wrong as an answer because foreign currency assets, mostly securities and deposits held in convertible currencies, are the largest of them. Option B is wrong because gold held by the Reserve Bank is a recognised reserve asset and has been used as one for a long time. Option C is wrong because special drawing rights, the reserve asset created by the International Monetary Fund and valued from a basket of major currencies, form another component. The fourth part, often asked as a fill in the blank, is the reserve tranche position in the IMF.