UPSC CSE Prelims
Exchange Rate Previous Year Questions (PYQs)
Practice solved questions for Exchange Rate with detailed step-by-step solutions, key insights, and trend analysis for UPSC CSE PRELIMS.
Solved Previous Year Questions
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Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of Indian rupee?
Detailed Explanation:
Answer: Option 4 — Following an expansionary monetary policy
An expansionary monetary policy involves lowering interest rates and increasing money supply, which makes the rupee less attractive to foreign investors and encourages capital outflow. This increases the supply of rupees in the forex market, leading to further depreciation rather than stabilizing it. To stop rupee depreciation, the RBI typically adopts a contractionary monetary policy (raising interest rates) to attract foreign capital inflows and support the currency.
✅ Option 1 – Likely measure: Curbing non-essential imports reduces dollar outflow while promoting exports increases dollar inflow, both supporting the rupee.
✅ Option 2 – Likely measure: Masala Bonds (rupee-denominated bonds issued abroad) attract foreign investment without creating dollar repayment obligations, supporting the rupee.
✅ Option 3 – Likely measure: Easing external commercial borrowing norms encourages dollar inflows from foreign lenders, increasing forex reserves and supporting the rupee.
❌ Option 4 – NOT a likely measure: Expansionary monetary policy weakens the currency by reducing returns on rupee assets and encouraging capital flight.
📝 Short Notes: Measures to Control Rupee Depreciation
| Type of Measure | Specific Actions | Impact on Rupee |
|---|---|---|
| Trade Measures | • Curb non-essential imports • Promote exports • Impose import duties |
Reduces dollar outflow and increases inflow |
| Capital Inflow Measures | • Masala Bonds • Ease FDI/FPI norms • Sovereign bonds |
Increases foreign investment without dollar liability |
| Monetary Policy | • Raise interest rates (contractionary) • Reduce liquidity |
Attracts foreign capital through higher returns |
| Forex Management | • RBI sells dollars from reserves • Forward rate management • Swap arrangements |
Directly increases dollar supply in market |
| External Borrowing | • Ease ECB norms • NRI deposit schemes • Bilateral currency swaps |
Increases dollar availability |
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