Consider the following statements about India’s International Investment Position(IIP): Statement-l:The ratio of India's international financial assets to its international financial liabilities improved recently. Statement-ll: It was due to the decline in inward direct and portfolio investments.
Which one of the following is correct in respect of the above statements ?
(a) Both Statement-I and Statement-II are correct and Statement-ll explains Statement-I
(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
(c) Statement-I is correct, but Statement-II is incorrect
(d) Statement-I is incorrect, but Statement-II is correct
Explanation Statement-I is correct:The Reserve Bank of India (RBI), in its report released on March 28, 2025, stated that India's international financial assets to liabilities ratio improved to 74.7% in December 2024, compared to 73.1% a year ago. Statement-II is correct:The improvement in the ratio resulted from a decline in inward direct and portfolio investments during the quarter. However, components such as trade credit, loans, and currency & deposits witnessed an increase.
Statement-II explains Statement-I: IIP Ratio= India's international financial assets/India’s financial liabilities
If international financial assets increase, the ratio rises.
If financial liabilities increase, the ratio declines.
If both fluctuate, the net effect determines the ratio's movement.
India’s international liabilities include:Foreign Direct Investment (FDI),Foreign Portfolio Investment (FPI),External Commercial Borrowing (ECBs),Non-Resident Deposits,Trade Credits.
Among these, FDI and FPI, which constitute a significant portion of India's liabilities, showed a declining trend, leading to a reduction in liabilities. This contributed to the improvement in the IIP ratio.
On the asset side, India's international financial assets include:Foreign Currency Assets (FCA),Direct Investment Abroad,Portfolio Investment,Trade Credits.While FCA recorded an increase, it was not sufficient to completely offset the decline in FDI and FPI.
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