money supply, banking & financial institutions section 4 MCQ Questions & Answers Detailed Explanation

Answer: (c)

Answer: (a)

National Centre for Financial Education (NCFE) is a Section 8 (Not for Profit) Company promoted (owned) by the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA).

Indian Financial Technology & Allied Services (IFTAS) is a wholly-owned subsidiary of the Reserve Bank of India, mandated to design, deploy & support IT-related services to the Reserve Bank of India, and all Banks and Financial Institutions in the country.

Answer: (b)

Recent changes: National Housing Bank was a wholly-owned (100%) subsidiary of RBI. But in 2019, Govt. of India took over the entire stake of NHB from RBI.

Housing finance companies (HFCs) are a category of NBFCs and till recently, HFCs were regulated by National Housing Bank (NHB). But this was changed in 2019 and now HFCs have come under the direct regulation of RBI.

This may have been done because of the bankruptcy issues going on in various housing finance companies like DHFL. Even if housing finance companies (HFCs) were a category of NBFCs, in the news the newspapers always mentioned NBFC and HFC separately.

The reason being NBFCs were regulated by RBI and HFC by National Housing Bank (which was regulated by RBI).

Answer: (b)

The reasons for deflation in the economy are:

1. When the Government withdraws money from circulation.
2. When Government imposes heavy direct taxes or takes heavy loans from the public (voluntary or compulsory or both).
3. When the Central Bank sells the securities in the open market (which reduces the quantity of money in circulation).
4. When Central Bank controls the credit money and adopts various measures such as an increase in CRR, credit rationing and direct action.
5. When the Central Bank increases the Bank rate (which curtails the quantity of credit in the economy).
6. When a state of over-production (excess supply over demand) takes place.

Answer: (b)

Devaluation in modern monetary policy is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged.

There are two implications for currency devaluation. First, devaluation makes a country’s exports relatively less expensive for foreigners and second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports.

As a result, this may help to reduce a country’s trade deficit. Import substitution means the promotion of export to replace imports. It is also a fallout of devaluation.

Answer: (d)

In India, any money you send overseas is subject to controls, as the government is wary of excessive outflows of foreign exchange draining its reserves and destabilising the rupee. But there has been an effort to gradually liberalise these controls.

The window that was opened up in 2004 for individuals to remit/send money across the border, without seeking specific approvals, was called the Liberalised Remittance Scheme (LRS).

Under LRS, all resident individuals (in India) can freely remit/send $250,000 overseas every financial year for a permissible set of current or capital account transactions.

Remittances are permitted for overseas education, travel, medical treatment and purchase of shares and property, apart from maintenance of relatives living abroad, gifting and donations. Individuals can also open, maintain and hold foreign currency accounts with overseas banks for carrying out transactions.

(Now anyone can say that “Rupee is fully convertible at current account” then what is this limit of $2,50,000? See, under this scheme, you can freely send the money abroad without specific government approvals, that is why the name is liberalized. But if you want to send more under current account then it may be possible but you may have to take specific approval of government which is not under this scheme)

However, the rules do not allow trading in “foreign exchange” (for example Dollar and Pound trading). Sending money to certain countries and entities is also barred. Under LRS, people can’t send money to countries identified as 'non-cooperative' by the Financial Action Task Force. Remittances are also prohibited to entities identified as posing terrorist risks.

The LRS represents India’s baby steps towards dismantling controls on foreign exchange movements in and out of the country. It has allowed large numbers of Indians to study abroad and diversify their portfolios from purely desi stocks and property.

Ideally speaking, capital controls in any form have no place in a liberalised economy. But for India, which is heavily dependent on imports of critical goods and perpetually spends more foreign exchange than it earns, it is difficult to free up remittances because of the havoc this can wreak on exchange rates.

The LRS gives you the freedom to put your money to work anywhere in the world. Until India is ready to free all capital controls, the LRS remains the most viable way for individuals to legally remit money overseas.