Module: | MODULE A: INTERNATIONAL BANKING
Q126: Consider the following statements regarding Merchanting Trade Transactions:
1. Merchanting trade involves the purchase of goods by a domestic trader from one foreign country and selling them to another foreign country without the goods ever crossing the domestic customs frontiers.
2. The entire financial cycle of a merchanting trade transaction, from the initial outward remittance to the final inward remittance, must be completed within an overall maximum period of 9 months.
3. Domestic traders are legally permitted to incur a net financial loss on the overall merchanting trade transaction if global market prices crash unexpectedly during transit.
Which of the above statements is or are INCORRECT?
2. The entire financial cycle of a merchanting trade transaction, from the initial outward remittance to the final inward remittance, must be completed within an overall maximum period of 9 months.
3. Domestic traders are legally permitted to incur a net financial loss on the overall merchanting trade transaction if global market prices crash unexpectedly during transit.
Which of the above statements is or are INCORRECT?
✅ Correct Answer: C
🎯 Quick Answer:
Statement 3 is the only incorrect statement.The physical goods move directly between the foreign countries, but the financial payments are routed through India.
Structural Breakdown: The central bank tightly regulates these transactions to prevent the misuse of foreign exchange.
The entire cycle must be concluded within 9 months, and the outward payment to the supplier must not precede the inward payment from the buyer by more than 4 months.
Historical Context: This framework was established to allow domestic traders to leverage their global market intelligence and networking skills without burdening the domestic ports and customs infrastructure.
Causal Reasoning: Statement 3 is strictly incorrect because regulatory guidelines explicitly mandate that a merchanting trade transaction must always result in a reasonable net financial profit.
The domestic trader is entirely prohibited from incurring a net loss, ensuring that the transaction results in a positive inflow of foreign exchange into the domestic economy.