Question 1

The ACU has been replaced by the INR-MVR bilateral settlement mechanism.

Accepted Answer

The ACU remains fully functional; the local currency settlement is an additional, voluntary option.

Question 2

All capital account transactions are now fully convertible between India and the Maldives.

Accepted Answer

Only 'permissible' capital account transactions specifically agreed upon by both central banks are allowed.

Question 3

Consider the following statements regarding the local currency settlement framework between India and the Maldives:
1. It replaces the Asian Clearing Union (ACU) mechanism for trade between the two countries.
2. The framework allows the exchange rate between the INR and MVR to be determined directly by the market.
3. The RBI issued the directive under the provisions of the Foreign Exchange Management Act (FEMA), 1999.
How many of the above statements are correct?

Accepted Answer

(b) Only two — Statement 1 is incorrect because the INR-MVR settlement is an additional mechanism alongside the ACU, not a replacement. Statements 2 and 3 are correct. Market-determined exchange rates are a core feature of the Local Currency Settlement framework, and the RBI derives its authority to permit such cross-border accounts under FEMA 1999.

Question 4

Match the following mechanisms/reports (List I) with their primary purpose/context (List II):
List I:
A. Special Rupee Vostro Account (SRVA)
B. Asian Clearing Union (ACU)
C. Inter-Departmental Group (IDG) Report 2023
D. Memorandum of Understanding (Nov 2024)

List II:
1. Multilateral netting arrangement for intra-regional transactions
2. Established the framework for INR-MVR bilateral trade settlement
3. Provided a roadmap for the internationalisation of the Indian Rupee
4. An account held by a domestic bank for a foreign bank to settle INR trades

Select the correct code:

Accepted Answer

(a) A-4, B-1, C-3, D-2 — A Special Rupee Vostro Account (SRVA) is maintained by an Indian bank on behalf of a foreign bank to facilitate INR trade (A-4). The ACU facilitates multilateral netting among member central banks (B-1). The 2023 IDG report headed by RS Ratho provided the roadmap for INR internationalisation (C-3). The Nov 2024 MoU between RBI and MMA laid the groundwork for INR-MVR settlement (D-2).

Question 5

Assertion (A): The local currency settlement between India and the Maldives helps mitigate the risk of exchange rate volatility for traders in both countries.
Reason (R): The framework eliminates the need to use a third-party vehicle currency like the US Dollar for invoicing and settling bilateral trade.
Select the correct answer:

Accepted Answer

(a) Both A and R are true and R is the correct explanation of A. — By eliminating the US Dollar (the vehicle currency) in bilateral trade, traders avoid the double conversion cost (INR to USD, USD to MVR) and are insulated from sudden fluctuations in the dollar's value. Therefore, R is a factual statement and directly explains the mechanism by which A is achieved.

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