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INDIAN ECONOMY QUIZ 1


  • a.) 
    keep more liquidity in the system
  • b.) 
     reduce liquidity
  • c.) 
    increase market interest rate
  • d.) 
    improve banking system's balance sheet 
Answer is (a)
What is negative interest rate policy?
A negative interest rate means the central bank charges negative interest on deposits made by commercial banks with the central bank. Here, instead of receiving money on deposits, commercial banks must pay to interest to the central bank. The banks will transfer this negative interest rate to their loan and deposit activities. But it is not necessary that banks will be charging negative interest rate, rather they may charge a small reduced interest rate after the central bank policy.
When negative interest rate policy is adopted? How it works?
The policy is adopted to escape from deflation. During adverse economic conditions households and business people waits for long to see the economy recovering. But this withholding of spending itself will make things worse. Lack of spending will reduce investment and jobs, leading to steep deflation and recession.




  • a.) 
     BIS    
  • b.) 
    OECD
  • c.) 
     IMF
  • d.) 
    FSB
Answer is (b)
Base Erosion and Profit Shifting (BEPS) is a technical term indicating the tax avoidance strategies of MNCs that reduces the tax bases for countries.  The terms base erosion and profit shifting are closely related. Usually, a company has to pay tax for its profit or income. This profit is the tax base for the government as tax is imposed as a percentage of this profit. Once profit is shifted to other countries or to tax havens, the tax base is eroded and there is no tax payment by the company in the concerned country. In recent years, Multinational Corporations (MNCs) are innovating sophisticated tax planning practices to avoid taxes by shifting profits to other countries especially to tax havens. This has resulted in the erosion of tax base.  
What is BEPS Project?
 The BEPS (Base Erosion and Profit Shifting) initiative is an OECD effort, approved by the G20, to design a globally standardized rules to check tax avoidance practices by the MNCs so that there will be no tax base erosion. OECD has set the December 2015 target to finally bring out the new standard rules that need international cooperation to check base erosion and profit shifting.
 As a part of the BEPS project, OECD has developed an action plan at the request of the G20 to counter the tax avoidance practice by corporate. The Action Plan includes fifteen detailed actions that governments can take to reduce the tax avoidance by MNCs. The Action Plan is scheduled to be completed in three phases: September 2014, September 2015, and December 2015.
 Some of the actions will require coordination and information sharing between governments, and potentially the amendment of existing tax treaties.


  • a.) 
    1, 2 and 3 are correct
  • b.) 
    1 and 2 are correct
  • c.) 
    1 only is correct
  • d.) 
    1 and 3 are correct
Answer is (d)
  • a.) 
    1, 2 and 3 are correct
  • b.) 
    1 and 2 are correct
  • c.) 
    1 only is correct
  • d.) 
    1 and 3 are correct
Answer is (d)


  • a.) 
    49%
  • b.) 
    51%
  • c.) 
    74%
  • d.) 
    26%
Answer is (b) 
RRBs Amendment Act 2015
The Regional Rural Banks (Amendment) Act, 2015, came into effect from 4th February 2016. The Act raises the amount of authorised capital to Rs 2,000 crore and states that it cannot be reduced below Rs One crore. The Act allows RRBs to raise capital from sources other than the existing shareholders -central and state governments, and sponsor banks.  Here, the combined shareholding of the central government and the sponsor bank cannot be less than 51%.
For the sponsoring banks, they can provide various initiating assistance to the RRBs beyond the initial five years (previously, the sponsoring bank's responsibility will be over in five years). The Act states that the central government may by notification raise or reduce the limit of shareholding of the central government, state government or the sponsoring bank in the RRB. For this, the central government may consult the state government and the sponsor bank.


  • a.) 
    NPA
  • b.) 
    Written off assets
  • c.) 
    Provisioned assets
  • d.) 
    Stressed assets
Answer is (d) 
Stressed assets = NPAs + Restructured loans + Written off assets
NPA: A loan whose interest and/or installment of principal have remained 'overdue ' (not paid) for a period of 90 days is considered as NPA.
Restructured loans: Restructured asset or loan are that assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing, or some combination of these measures. Hence, under restructuring a bad loan is modified as a new loan. A restructured loan also indicates bad asset quality of banks. This is because a restructured loan was a past NPA or it has been modified into a new loan. Whether the borrower will repay it in future remains a risky element. Corporate Debt Restructuring Mechanism (CDM) allows restructuring of loans.
Written off assets: Written off assets are those the bank or lender doesn't count the money borrower owes to it. The financial statement of the bank will indicate that the written off loans are compensated through some other way. There is no meaning that the borrower is pardoned or got exempted from payment.


  • a.) 
    a strong link between base rate and repo rate
  • b.) 
    a balanced external sector situation
  • c.) 
    sufficiently large foreign exchange reserve
  • d.) 
    presence of big domestic banks 
Answer is (a)
What is monetary transmission?
 Monetary transmission refers to the process by which a central bank's monetary policy signals (like repo rate) are passed on, through financial system to influence the businesses and households.
 There are many monetary policy signals by the RBI; the most powerful one is the repo rate. When repo rate is changed, it brings changes in the overall interest rate in the economy as well. As a result of a decrease in repo rate, the interest rate on loans by banks also changes and this encourages consumption and investment activities of businesses and households. In an economy, both consumption and investment are often financed by borrowings from banks. As the repo rate brings changes in market interest rate, the repo rate channel is often referred as interest rate channel of monetary transmission.
 Repo rate Interest rate ↓→Consumption, Investment Output↑→ Growth
Interest rate is the main channel of monetary policy transmission. Similarly, there is credit channel, asset price channel, confidence channel etc.
An interesting development in recent times is that often central banks gives certain communications in the form of guidelines which are aimed to create certain effects in the financial market.


  • a.) 
    demand pull inflation 
  • b.) 
    cost push inflation
  • c.) 
    structural inflation 
  • d.) 
    open inflation
Answer is (b)
Cost -Push inflation: Cost push inflation is caused by rise in the prices of inputs like power, labour, raw materials etc


  • a.) 
    all assets
  • b.) 
    bad assets
  • c.) 
    capital
  • d.) 
    profit
Answer is (b) 
Under provisioning, banks have to set aside or provide funds to a prescribed percentage of their bad assets. The percentage of bad asset that has to be 'provided for' is called provisioning coverage ratio. The provisioning coverage ratio is the percentage of bad assets that the bank has to provide for (keep money) from their own funds –most probably profit.


  • a.) 
    Infrastructure
  • b.) 
    Foreign trade
  • c.) 
    Banking
  • d.) 
    Microfinance
Answer is (a) 
Hybrid annuity
In financial terminology hybrid annuity means that payment is made in a fixed amount for a considerable period and then in a variable amount in the remaining period. This hybrid type of payment method is attached under the HAM.
The Hybrid Annuity Model (HAM)
In India, the new HAM is a mix of BOT Annuity and EPC models. As per the design, the government will contribute to 40% of the project cost in the first five years through annual payments (annuity). The remaining payment will be made on the basis of the assets created and the performance of the developer. Here, hybrid annuity means the first 40% payment is made as fixed amount in five equal installments whereas the remaining 60% is paid as variable annuity amount after the completion of the project depending upon the value of assets created.
As the government pays only 40%, during the construction stage, the developer should find money for the remaining amount. Here, he has to raise the remaining 60% in the form of equity or loans.
There is no toll right for the developer. Under HAM, Revenue collection would be the responsibility of the National Highways Authority of India (NHAI).


  • a.) 
    Forward guidance    
  • b.) 
    Tapering
  • c.) 
    Communication
  • d.) 
    Monetary Policy Transmission
Answer is (a) 
Forward guidance: Forward guidance is the use of communication by the central bank about its future actions to influence behavior of economic agents today. The logic of forward guidance is that central banks can influence monetary conditions today by giving indications about how they behave tomorrow.

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