Special Drawing Rights, which form part of a country's foreign exchange reserves, are issued by
- A.The World Bank
- B.The International Monetary Fund
- C.The World Trade Organization
- D.The Bank for International Settlements
Correct answer
Explanation
The correct answer is B, the International Monetary Fund. Special drawing rights are an international reserve asset created by the IMF and allotted to member countries in proportion to their quotas; a member can exchange them with other members for usable currencies. Their value is calculated from a basket of major currencies that contains the US dollar, the euro, the Chinese yuan, the Japanese yen and the pound sterling. Option A is wrong because the World Bank lends for development projects and does not issue reserve assets. Option C is wrong because the World Trade Organization frames the rules of international trade and has no monetary role. Option D is wrong because the Bank for International Settlements serves as a bank for central banks and a forum for regulation, but does not create reserve assets. Remember that SDRs and the reserve tranche position are the two IMF related items in India's reserves.
Read the full article: Foreign Exchange and Exchange Rate: Concepts and Policy
Practice Questions
View allWith reference to the Indian economy, consider the following statements: 1. An increase in the Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee. 2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness. 3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER. Which of the above statements are correct?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
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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.
Read the full explanation →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?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
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Statement 1 is right because when the United States Federal Reserve tightens, returns there become attractive and portfolio money flows out of emerging markets, which is capital flight.
Read the full explanation →What challenge does foreign investment often face in India?
- A.Excessive foreign competition
- B.Inconsistent regulatory environment
- C.Lack of skilled labour
- D.Lack of consumer base
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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.
Read the full explanation →The Foreign Exchange Management Act, FEMA, replaced which of the following laws?
- A.Foreign Exchange Regulation Act, 1973
- B.Banking Regulation Act, 1949
- C.Monopolies and Restrictive Trade Practices Act, 1969
- D.Securities and Exchange Board of India Act, 1992
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FERA treated foreign exchange as a scarce resource, forbade most dealings unless permitted and made breaches criminal offences.
Read the full explanation →In which year did India accept the obligations of Article VIII of the IMF, making the rupee fully convertible on the current account?
- A.1991
- B.1993
- C.1994
- D.1999
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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.
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