UPSC Prelims 2021 · Question 7 of 97

UPSC Prelims 2021 question on Capital Account Items

Consider the following:

1. Foreign currency convertible bonds

2. Foreign institutional investment with certain conditions

3. Global depository receipts

4. Non-resident external deposits

Which of the above can be included in Foreign Direct Investments?

  1. 1, 2 and 3
  2. 3 only
  3. 2 and 4
  4. 1 and 4
Show answer

Answer: A. 1, 2 and 3

Verdict

Correct statements: 1, 2 and 3 → Option (a).

Analysis

In the Capital Account of Balance of Payment, items can be classified into Investment, Borrowings and External Assistance. Investment includes equity flows into the economy.

Statement by statement

Statement 1 — CORRECT: Foreign Currency Convertible Bonds (FCCB) are instruments for foreign investment in India and are part of FDI.

Statement 2 — CORRECT: Foreign Institutional Investment (subject to the overall limit of 24%) is included under FDI as per the question's framing.

Statement 3 — CORRECT: Global Depository Receipts (GDR) are instruments for foreign investment in India and are part of FDI.

Statement 4 — INCORRECT: Non-Resident External (NRE) deposits are 'debt creating' flows in the balance of payments and are NOT part of Foreign Direct Investments.

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