UPSC Prelims 2019 Question:

Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of Indian rupee?

Explanation:

• Rupee depreciation will result in increased costs of imports like crude oil, etc., which will cause an inflationary effect on the economy.
  
  

• Expansionary monetary policies by the Reserve Bank of India will reduce Cash Reserve Ratio, Statutory Liquidity Ratio, Repo Rate, Bank Rate, etc., which will result in an increased money supply in the economy. Banks will have more money for lending purposes, which will put more money in the hands of people to spend.
  
  
• Increased expenditure will result in increased aggregate demand in the market. Collectively rupee depreciation and increased aggregate demand will result in inflation in the economy. To tackle inflation RBI generally follows a contractionary monetary policy to reduce the money supply in the economy. The RBI will actively sell Dollars from the country’s foreign exchange reserves to stabilize the rupee exchange rate and will encourage more foreign investment in India.
  
  
• Curbing imports of non-essential goods and promoting exports, encouraging Indian borrowers to issue rupee denominated Masala Bonds, easing conditions relating to external commercial borrowing will help stop the slide of Indian rupee. 
  
  

Therefore, option (4) is the correct answer.

Subject: Economics | Exchange Rate