Daily Quiz: UPSC Prelims Marathon – February 20, 2018

Reducing import duties will facilitate more imports widening the Current Account Deficit.  Hence, policy 1 will not be able to address concerns of current account deficit.

Statement 1 is incorrect. Systemically Important Financial Institutions (SIFIs) are not always government undertakings.

Statement 2 is correct. Financial Stability Board (FSB) refers Systemically Important Financial Institutions (SIFIs) as institutions “whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity”.

Statement 3 is incorrect. Recently, the Reserve Bank of India (RBI) said that it has identified private bank HDFC Bank as Domestic Systemically Important Bank or D-SIB. HDFC is the third in RBI’s domestic important banks’ list after state-run SBI and ICICI which were included in 2015.

D-SIB is also referred as Domestic Systemically Important Bank. These are those banks which are – in domestic market – big in size and have the potential to disrupt the financial stability in case they fail.

In case of a financial crisis in the country, the RBI stands by the commercial banks as a guarantor and extends loans to ensure the solvency of the latter. This system of guarantee assures individual account holders that their banks will be able to pay their money back in case of a crisis and there is no need to panic thus avoiding bank runs.

Forex reserves are foreign currency assets held by the central banks of countries.

These assets include foreign marketable securities, monetary gold, special drawing rights (SDRs) and reserve position in the IMF. The main purpose of holding foreign exchange reserves is to make international payments and hedge against exchange rate risks.

Revenue Expenditures are those expenditures which don’t create any productive assets. The money in these expenditures goes either in running administration / operation of government or in welfare schemes which don’t result in creation of assets.

Statement 1 is incorrect. Headline inflation is a measure of the total inflation within an economy, including commodities such as food and energy prices (e.g., oil and gas), which tend to be much more volatile and prone to inflationary spikes.

Statement 2 is incorrect. Core inflation represents the long run trend in the price level. In measuring long run inflation, transitory price changes should be excluded. One way of accomplishing this is by excluding items frequently subject to volatile prices, like food and energy. Thus, it may give an accurate picture of how an economy is behaving.

The budget of the government reflects a deficit when expenditure exceeds revenue. To meet this gap, the government may ask the central bank to print additional money. Since pumping of additional money is required to meet the budget deficit, any price rise may be called the deficit-induced inflation.