Module: | MODULE A: INTERNATIONAL BANKING
Q179: Consider the following statements regarding the classification of foreign exchange transactions:
1. Current account transactions are generally permitted in India unless specifically prohibited by the Government of India or the Reserve Bank of India.
2. Capital account transactions are generally prohibited in India unless specifically permitted by the Reserve Bank of India.
3. Remittances made by an Indian resident to a family member abroad for living expenses are classified as capital account transactions.
Which of the statements given above is or are correct?
2. Capital account transactions are generally prohibited in India unless specifically permitted by the Reserve Bank of India.
3. Remittances made by an Indian resident to a family member abroad for living expenses are classified as capital account transactions.
Which of the statements given above is or are correct?
✅ Correct Answer: A
🎯 Quick Answer:
Option A is correct because only statements 1 and 2 are accurate.Structural Breakdown: A current account transaction alters the short-term income or expenses of a resident but does not alter their assets or liabilities outside India.
A capital account transaction alters the assets or liabilities of an Indian resident outside India, or of a non-resident inside India.
Therefore, India has full current account convertibility, meaning it is permitted unless blocked, but partial capital account convertibility, meaning it is blocked unless permitted.
Statement 3 is incorrect because remittances for family living expenses do not create an asset or liability abroad; thus, they are current account transactions.
Historical Context: India adopted full current account convertibility in August 1994 in compliance with Article 8 of the International Monetary Fund, signaling a major milestone in India's economic liberalization.
Causal Reasoning: The causal logic for maintaining strict controls on capital account transactions is to protect the domestic economy from sudden macroeconomic shocks, such as massive capital flight during a global financial crisis, which could destabilize the Indian Rupee.