Previous Year Question

A slide in the value of the rupee means that the rupee is weakening against foreign currencies, particularly the dollar. For example, if the exchange rate moves from ₹70 per dollar to ₹80 per dollar, more rupees are required to purchase one dollar.

Measures intended to arrest the rupee’s decline generally seek to increase the supply of foreign exchange or reduce its demand.

Option (a) can support the rupee.

Restricting non-essential imports may reduce importers’ demand for dollars. Higher exports bring dollars or other foreign currencies from overseas buyers. This can improve the net availability of foreign exchange and moderate depreciation pressure on the rupee.

Essential imports such as energy, machinery and intermediate goods may be difficult to reduce immediately. The measure therefore primarily concerns non-essential imports.

Option (b) can support the rupee.

Masala Bonds are issued overseas but denominated in Indian rupees. Foreign investors provide foreign currency while the bond liability is expressed in rupees.

Such bonds may bring foreign capital into India and increase the supply of foreign exchange. Since the bonds are rupee-denominated, the exchange-rate risk is borne primarily by the foreign investor rather than the Indian issuer.

Option (c) can support the rupee.

Under the External Commercial Borrowing framework, eligible Indian entities obtain commercial loans from foreign sources. Easing ECB conditions can enable Indian borrowers to mobilise more funds abroad.

When foreign borrowing proceeds enter India, they may increase the supply of foreign currency and provide short-term support to the rupee. Excessive ECBs can, however, increase external-debt, refinancing and exchange-rate risks. They are therefore regulated through conditions relating to maturity, cost and permitted end-use.

Option (d) is not a likely measure to stop the rupee’s decline.

An expansionary monetary policy generally reduces interest rates and increases domestic liquidity. Lower Indian interest rates can reduce the relative return on rupee-denominated financial assets, potentially discouraging foreign inflows or encouraging capital outflows.

Higher liquidity may also increase domestic demand, imports and inflation. These developments can create additional depreciation pressure on the rupee. An expansionary monetary policy is therefore not the most likely measure for arresting its decline.