Question 21 from UPSC CSE 2019 - Economics

Question

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

IASCODEX · Accepted Answer

Correct Option: D. Following an expansionary monetary policy

Strategy: Focus on identifying which option, if implemented, would actually worsen the rupee's fall rather than arrest it. Expansionary monetary policy increases the money supply and reduces interest rates, which tends to depreciate the currency. The other options would generally support the rupee by reducing demand for foreign exchange or increasing foreign currency inflow. Thus, 'expansionary monetary policy' is the least likely action to stop the rupee slide.

Key Info: Expansionary monetary policy refers to steps taken by a central bank to increase money supply and lower interest rates, aiming to stimulate economic activity. This policy generally depreciates the domestic currency as lower interest rates make domestic assets less attractive, leading to capital outflows. Curbing imports and promoting exports improve the balance of payments and help stabilize the rupee by reducing demand for foreign currency and increasing inflows. Masala Bonds are rupee-denominated bonds issued abroad, raising foreign capital without adding to external debt liability in foreign currency, thus supporting the rupee. Easing external commercial borrowing (ECB) conditions can increase dollar inflow for Indian companies, temporarily supporting the rupee, though with long-term risks. Particularly during rupee depreciation, contractionary or tightening monetary policies (raising interest rates) are used to attract foreign investment and defend the currency, not expansionary ones.

IASCODEX · Answer

Option A: Curbing imports of non-essential goods and promoting exports

IASCODEX · Answer

Option B: Encouraging Indian borrowers to issue rupeeâdenominated Masala Bonds

IASCODEX · Answer

Option C: Easing conditions relating to external commercial borrowing