UPSC Prelims Practice Questions — As oil prices increase, RBI opens special window for PSU oil firms to meet their daily dollar needs

Q1. With reference to the management of the Indian rupee's exchange rate, consider the following statements: Which of the statements given above is/are correct?

  1. The rupee's external value became market-determined when India made the rupee fully convertible on the capital account in the 1990s.
  2. Besides outright spot transactions, the RBI also intervenes in the foreign exchange market through forwards and swaps, including sell-buy swaps.
  3. The Foreign Exchange Management Act, 1999 aims, among other things, at promoting the orderly development and maintenance of the foreign exchange market in India.
  • A. 1 and 3 only
  • B. 1, 2 and 3
  • C. 2 and 3 only
  • D. 1 and 2 only

Q2. With reference to India's foreign exchange reserves, consider the following statements: Which of the statements given above is/are correct?

  1. The legal framework for deploying India's foreign exchange reserves in foreign currency assets and gold is provided by the Reserve Bank of India Act, 1934.
  2. In managing the reserves, the RBI places return ahead of liquidity, treating the reserves primarily as an income-earning portfolio.
  3. When the RBI meets oil companies' dollar needs by selling dollars to them through designated banks, those dollars come out of the reserves of which the RBI is custodian.
  • A. 2 and 3 only
  • B. 1 and 3 only
  • C. 1, 2 and 3
  • D. 1 and 2 only

Q3. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. The RBI's special dollar window for public sector oil marketing companies can ease pressure on the rupee even though it does not reduce what those companies spend on crude imports.
  2. Meeting a large, recurring demand for dollars outside the spot foreign exchange market lowers the buying pressure on dollars within that market.
  • A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
  • B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
  • C. Statement-I is correct, but Statement-II is incorrect
  • D. Statement-I is incorrect, but Statement-II is correct

Q4. Suppose international crude oil prices rise sharply while the volume of India's crude imports stays unchanged. Consider the following likely consequences: Which of the statements given above is/are correct?

  1. India's merchandise trade deficit widens.
  2. Demand for US dollars in the domestic foreign exchange market rises, putting depreciation pressure on the rupee.
  3. India's current account deficit narrows, because the export earnings of refiners from petroleum products rise in proportion to the import bill.
  • A. 2 only
  • B. 1 and 3 only
  • C. 1, 2 and 3
  • D. 1 and 2 only

Q5. Consider the following statements regarding how an oil-price shock is transmitted to domestic prices in India: Which of the statements given above is/are correct?

  1. A depreciation of the rupee raises the rupee cost of imported crude even if the dollar price of crude remains unchanged.
  2. The inflationary effect of costlier fuel stays confined to fuel prices and does not spread to transport costs.
  3. An appreciation of the rupee would amplify the effect of a rise in dollar crude prices on domestic fuel costs.
  • A. 1 only
  • B. 1 and 2 only
  • C. 2 and 3 only
  • D. 3 only

Q6. The RBI has decided to meet the entire daily dollar requirement of three public sector oil marketing companies by selling dollars to them through designated banks, until further notice. These companies together need roughly US$300 million a day to pay for crude imports. Which of the following inferences can be drawn from the above?

  1. Dollar demand placed in the spot foreign exchange market by these three companies will fall.
  2. Private refiners operating in India will also cease buying dollars in the spot market.
  3. The rupee will stop depreciating against the dollar for as long as the window remains open.
  4. The total dollar outgo on India's crude import bill will fall.
  • A. 1, 2 and 4 only
  • B. 2 and 4 only
  • C. 1 only
  • D. 1 and 3 only

Q7. With reference to instruments used in the foreign exchange market, consider the following statements: Which of the statements given above is/are correct?

  1. A forward contract fixes today the exchange rate at which currencies will be exchanged on a specified future date.
  2. In a sell-buy swap, the central bank sells dollars in the spot leg and buys them back in the forward leg, so the fall in its reserves is temporary.
  3. Unlike a swap, an outright spot sale of dollars by the central bank reduces its reserves without any built-in reversal.
  • A. 1 only
  • B. 1, 2 and 3
  • C. 1 and 2 only
  • D. 2 and 3 only

Q8. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. The RBI's special dollar window for oil marketing companies is designed to hold the rupee at a fixed level against the US dollar for as long as the window remains open.
  2. Under India's exchange rate policy, the RBI intervenes to contain excessive volatility in the rupee without reference to any pre-determined target level or band.
  • A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
  • B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
  • C. Statement-I is correct, but Statement-II is incorrect
  • D. Statement-I is incorrect, but Statement-II is correct