Module: | MODULE A: INTERNATIONAL BANKING
Q188: Consider the following statements regarding the regulatory jurisdiction over current and capital account transactions under the Act:
1. The Central Government, in consultation with the Reserve Bank of India, holds the authority to prescribe rules for current account transactions.
2. The Reserve Bank of India, in consultation with the Central Government, has the authority to specify permissible classes of capital account transactions and their limits.
3. Under the Act, the amortization of loans and the depreciation of direct investments are treated strictly as capital account transactions.
Which of the statements given above is or are correct?
2. The Reserve Bank of India, in consultation with the Central Government, has the authority to specify permissible classes of capital account transactions and their limits.
3. Under the Act, the amortization of loans and the depreciation of direct investments are treated strictly 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: Under Section 5, the Central Government regulates current account transactions, meaning it can restrict trade-related payments if necessary for public interest.
Under Section 6, the Reserve Bank of India regulates capital account transactions, controlling debt, equity, and asset creation.
Statement 3 is incorrect because the Act explicitly defines the amortization of loans, which means the regular repayment of principal, and the depreciation of direct investments as current account transactions, not capital account transactions.
Historical Context: This separation of powers reflects a dual mandate.
The government manages immediate trade and foreign policy objectives via the current account, while the central bank guards long-term monetary and financial stability via the capital account.
Causal Reasoning: The causal reasoning for treating loan amortization as a current account transaction is to ensure that businesses do not face regulatory bottlenecks when honoring their routine contractual debt repayment obligations, thereby preventing corporate defaults.