Economy · X-Factor Notes
Foreign Exchange, FDI, External Debt revision notes for UPPCS Prelims.
High-Yield Revision| Concept | What to remember | Asked in UPPCS |
|---|---|---|
| Current Account Convertibility | Indian Rupee was made fully convertible on the Current Account in August, 1994. This means the rupee is convertible into foreign currencies for current transactions (trade in goods and services). Advocated to attract more foreign capital inflow and promote exports. | UPPCS (Mains) 2004, U.P.R.O./A.R.O. (Mains) 2017, U.P. U.D.A./L.D.A. (Spl.) (Pre) 2010, UPPCS (Pre) 1995 |
| Capital Account Convertibility (CAC) | Implies the Rupee can be exchanged for any major currency for the purpose of trading financial assets. India currently has a partial CAC. The S.S. Tarapore Committee was related to fuller capital account convertibility. | |
| Devaluation of Currency | Means reduction in the value of a currency vis-a-vis major internationally traded currencies. The outcome is an |
| Concept | What to remember | Asked in UPPCS |
|---|---|---|
| FDI Composition | FDI includes investments through capital instruments in unlisted Indian companies or 10% or more of the equity capital of a listed company. FDI is generally considered stable and effective for development compared to FPI. FDI includes subsidiaries and majority foreign equity holding. | |
| FDI Classification | Foreign Currency Convertible Bonds (FCCBs) and Foreign Institutional Investment (FII) with holdings of 10% or more of the paid-up equity capital can be classified as FDI. | |
| Sector Attracting Highest FDI |
| Concept | What to remember | Asked in UPPCS |
|---|---|---|
| External Debt Composition | Commercial borrowings have consistently been the largest component of India's external debt (approx. 36.8% at end-Dec 2021), followed by NRI deposits. Increase in external debt in early 2000s was driven by commercial borrowings and NRI deposits. | U.P. R.O./A.R.O. (Pre) 2017, UPPCS (Mains) 2010* |
| External Debt Regulation | External commercial borrowings (ECBs) are regulated by the Reserve Bank of India (RBI). | UPPCS (Mains) 2010 |
| India's Debt Status |
| Concept | What to remember | Asked in UPPCS |
|---|---|---|
| Reducing CAD/Crisis Risk | Actions to reduce Current Account Deficit (CAD) include devaluing the domestic currency and policies attracting greater FDI and FII. Reducing the risk of a currency crisis is aided by foreign currency earnings (like from the IT sector) and remittances from Indians abroad. | |
| Immunity to Global Crisis | Not depending on short-term foreign borrowings is the policy most likely to give India immunity during a global financial crisis. Full Capital Account Convertibility increases vulnerability and does not provide immunity. | |
| Factors Affecting Rupee Value |
| U.P. Lower Sub. (Pre) 2004, U.P.R.O./A.R.O. (Pre) 2014, UPPCS (Spl.) (Mains) 2008, UPPCS (Mains) 2003 |
| FEMA (Foreign Exchange Management Act) | Replaced FERA. Came into force on June 1, 2000. Was finally/fully implemented in 2002. Violation of foreign exchange rules ceased to be a criminal offence under FEMA. | UPPCS (Mains) 2007, UPPCS(Pre) 2013 |
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| Historically and recently (as of 2016 and 2018-2021 data), the Services sector has attracted high FDI inflows. The Computer Software and Hardware sector held the largest share in the last three years (2018-2021). |
| UPPCS (Main) 2006, UPPCS (Pre) 2006*, UPPCS (Spl.) (Mains) 2008 |
| Top FDI Source Countries | Top investing countries in FDI equity inflows (2020-21) were Singapore > USA > Mauritius. Historically, USA and Japan were top sources (1991-1995). | UPPCS (Pre) 1995 |
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| FDI Limit in Insurance | The FDI limit for the Insurance Sector was increased from 49% to 74% in the Union Budget 2021-22. | UPPCS (Mains) 2012 |
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| Participatory Notes (PNs) | Associated with Foreign Institutional Investors (FIIs). They allow overseas investors to invest in Indian stock markets without registering with SEBI. |
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| World Bank classifies India as a less indebted country. |
| UPPCS (Mains) 2009 |
| Foreign Exchange Reserves (FER) | Maintained by the Reserve Bank of India (RBI). Consist of foreign currency assets, gold holdings of RBI, SDRs (Special Drawing Rights), and Reserve Tranche Position in the IMF. | UPPCS (Pre) 2012 |
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| Import Cover | Defined as the number of months of imports that could be paid for by a country's international reserves. |
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| Recent FER Data | Foreign exchange reserves USD 703 Billion. (2025) | UPPCS RO-ARO 2023 Prelims Re-Exam |
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| High inflation rate, high fiscal deficit, and high crude oil prices are factors that determine the exchange value of money. |
| UPPCS (Mains) 2013 |
| SDR | SDR (Special Drawing Right) is an artificial currency created by the IMF. |
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