UPSC Essentials: Economy Quiz

UPSC Essentials brings to you its initiative of subject-wise quizzes. These quizzes are designed to help you revise some of the most important topics from the static part of the syllabus. Attempt today’s subject quiz on the Economy to check your progress. 🚨 Click Here to read the UPSC Essentials magazine for July 2026 . Share your views and suggestions in the comment box or at manas.srivastava@ indianexpress.com 🚨 Consider the following statements: 1. When the Reserve Bank of India (RBI) assesses that economic growth is weak and inflation is below its target, it may reduce the repo rate to make borrowing cheaper for commercial banks. 2. A reduction in the repo rate always leads to a proportional reduction in lending rates by commercial banks, irrespective of liquidity conditions and banks’ financial position. Which one of the following is correct in respect of the above statements? (a) Both Statement 1 and Statement 2 are correct and Statement 2 is the correct explanation for Statement 1. (b) Both Statement 1 and Statement 2 are correct and Statement 2 is not the correct explanation for Statement 1. (c) Statement 1 is correct but Statement 2 is incorrect. (d) Statement 1 is incorrect but Statement 2 is correct. Relevance: Monetary policy instruments of the RBI, especially the repo rate and their impact on inflation and economic growth, are frequently tested in UPSC Prelims. UPSC can frame conceptual questions on the transmission of monetary policy and the role of commercial banks in the economy. Explanation — Once every two months, the RBI’s MPC sits down to take stock of India’s economy and decide whether it wants to change the interest rates prevailing in the country . — Most economists and observers expect the RBI to “maintain a status quo” on interest rates. The lack of any changes in the interest rates, however, should not detract from the fact that the world over economies are facing a fairly unprecedented level of uncertainty. Even when a central bank decides to do nothing, as it were, it bases its decision after considering several factors. — When the RBI evaluates that economic growth is weak and inflation rate is falling below its target, it reduces the repo rate — making it cheaper for commercial banks to borrow. When the cost of their own borrowing falls, commercial banks cut the interest rate at which they lend to the rest of the economy — be it a consumer wanting to borrow for purchasing a car or home or a businesswoman wanting to borrow to start her own company. This is how the RBI incentivises economic growth while maintaining price stability. Hence, statement 1 is correct. — A repo rate cut does not always result in a commensurate reduction in lending rates. The extent of transmission is determined by a number of factors, including bank funding costs, liquidity circumstances, asset quality, competitiveness, and general financial health. Hence, statement 2 is not correct. Therefore, option (c) is the correct answer. The term ‘yen carry trades’ refers to: (a) Borrowing Japanese yen at low interest rates to invest in higher-yielding assets or currencies elsewhere. (b) A trade settlement mechanism under which Japan accepts payments only in Japanese yen for all its exports. (c) A policy of the Bank of Japan to intervene in foreign exchange markets by purchasing foreign government bonds. (d) An arrangement under which Japanese firms lend exclusively to overseas governments for infrastructure development. Relevance: The yen carry trade is an important concept in international finance that is often in the news due to its impact on global capital flows and financial market volatility. Explanation — The United States and Japan confirmed a joint coordinated intervention in the Japanese currency market aimed at smoothing out excessive volatility in the yen . The move aims to strengthen the yen against the US dollar. What is the Yen carry trade ? — Global investors are always looking for opportunities to make money. One way to do this is to borrow money in a country where the interest rates are low and invest that money (after converting the currency) in a country where the interest rates are much higher. Simply put, this is called a carry trade. — Such opportunities can exist because central banks of different countries try to keep interest rates at a level that suits their specific economic conditions. A case in point is that of Japan where the central bank (the Bank of Japan) had kept interest rates at zero percent between 2011 and 2016 and, in fact, pushed them even below zero (-0.10%) since 2016. The idea behind low interest rates is to stimulate economic activity. Therefore, option (a) is the correct answer. With reference to the Special Assistance to States for Capital Investment (SASCI) scheme, consider the following statements: 1. The scheme is managed by the Ministry of Finance. 2. Under the scheme, the Union government aims to provide 50-year interest-free loans to states and union territories to boost capital spending. Which of the statements given above is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 Relevance: SASCI is an important Centre–State fiscal initiative and is frequently in the news during the Union Budget and discussions on public capital expenditure. The scheme is also relevant in the context of cooperative fiscal federalism, capital expenditure, and infrastructure-led economic growth. Explanation — The Centre has approved all 28 infrastructure projects proposed by the Delhi government under the Special Assistance to States for Capital Investment (SASCI) scheme at a total cost of Rs 1,647 crore — a hike of nearly 200% of the amount sanctioned last year. The Centre has also sanctioned an additional Rs 756 crore as an incentive in recognition of Delhi’s efforts to increase capital expenditure from its own resources, officials said. — Under the SASCI scheme, managed by the Ministry of Finance, the Centre provides long-term, 50-year interest-free loans to states and union territories to boost capital spending. It also provides incentives tied to reforms and capital investment by states. Hence, statements 1 and 2 are correct. — The 2026-27 Union Budget allocated Rs 2 lakh crore as 50-year, interest-free capex loans for states under SASCI. Under the programme, while Rs 75,000 crore is ‘untied’ – or provided without any conditions – the majority is tied to the reform performance of each state across a variety of spheres ranging from power, mining, agriculture, and public finance, among others. As such, the better a state performs on these reform criteria, the more they can avail from the ‘tied’ component of the programme. Therefore, option (c) is the correct answer. With reference to India’s development partnership with Sri Lanka, consider the following infrastructure projects: 1. Sampur Solar Power Project 2. Trincomalee Tank Farm Development 3. West Container Terminal at Colombo Port 4. Colombo Port City How many of the above projects are part of India’s development partnership with Sri Lanka? (a) Only one (b) Only two (c) Only three (d) All four Relevance: India-supported infrastructure and connectivity projects in neighbouring countries can be asked under India’s neighbourhood policy and strategic affairs. The topic is relevant in the context of India–Sri Lanka relations, maritime security, and regional connectivity initiatives in the Indian Ocean Region. Explanation — India and Sri Lanka have agreed to take forward the negotiations on updating the Free Trade Agreement and will sign the Social Security pact soon, as Foreign Secretary Vikram Misri met Sri Lankan President Anura Kumara Dissanayake in Colombo on Wednesday. — The discussions between visiting Foreign Secretary Misri and Sri Lankan President Dissanayake focused on issues of “mutual interest and review of key bilateral projects, including assisted development projects in Sri Lanka”. — Following the meeting, both sides exchanged agreements on INR-denominated Lines of Credit for USD 350 million, which form part of the USD 450 million reconstruction package extended by India in the wake of Cyclone Ditwah. The LoCs will support reconstruction, infrastructure development, and procurement requirements that arose in the aftermath of the cyclone, the Indian High Commission in Sri Lanka said. — In Sri Lanka, the projects supported by India are Sampur Solar Power Project, Trincomalee Tank Farm Development, and West Container Terminal at Colombo Port, while the Colombo Port City Project is supported by China. Therefore, option (c) is the correct answer. Which of the following is/are remittance facilities under the Liberalised Remittance Scheme (LRS) is not available for residents? 1. Remittances for the purchase of lottery tickets. 2. Remittances for purchase of Foreign Currency Convertible Bonds (FCCBs) issued by Indian companies in the overseas secondary market. 3. Remittance for trading in foreign exchange abroad. Select the correct answer using the codes given below: (a) 1 only (b) 1 and 3 only (c) 1 and 2 only (d) 1, 2 and 3 Relevance: The Liberalised Remittance Scheme (LRS) is an important RBI framework governing outward remittances by resident individuals and is frequently in the news due to changes in remittance limits and tax rules. The topic also links to external sector management, capital account transactions, and foreign exchange regulations, making it relevant for Economy in both Prelims and Mains. Explanation — Resident individuals stepped up overseas investments in equity and debt instruments while spending more on leisure and other travel in May 2026 , helping outward remittances under the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS) recover from the previous month. — Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both. Further, resident individuals can avail of foreign exchange facility for the purposes, within the limit of USD 2,50,000 only. — The remittance facility under the Scheme is not available for the following: (i) Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000. (ii) Remittance from India for margins or margin calls to foreign exchanges / offshore counterparty. (iii) Remittances for purchase of FCCBs issued by Indian corporations in the international secondary market. (iv) Remittances for foreign exchange transactions abroad. (v) Direct or indirect capital account transfers to nations designated by the Financial Action Task Force (FATF) as “non-cooperative countries and territories” on a regular basis. (vi) Remittances directly or indirectly to those individuals and businesses recognised as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks. (vii) A resident makes a gift in foreign currency to another resident in order to credit the latter’s LRS foreign currency account held abroad. Therefore, option (d) is the correct answer. (Source: http://www.rbi.org.in ) Daily Subject-wise quiz — History, Culture, and Social Issues (Week 159) Daily subject-wise quiz — Polity and Governance (Week 174) Daily subject-wise quiz — Science and Technology (Week 174) Daily subject-wise quiz — Economy (Week 173) Daily subject-wise quiz — Environment and Geography (Week 173) Daily subject-wise quiz – International Relations (Week 173) Subscribe to our UPSC newsletter and stay updated with the news cues from the past week. 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