UPSC Prelims 2019 · Question 26 of 99
UPSC Prelims 2019 question on Stopping Rupee Depreciation
- ExamUPSC CSE
- Year2019
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicMoney Market
- DifficultyEasy
- TypeDirect
Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of Indian rupee?
Show answer
Answer: D. Following an expansionary monetary policy
Expansionary monetary policy is when the RBI would use its tools to stimulate the economy. That increases the money supply, lowers interest rates, and increases aggregate demand.
Lower interest rates will also tend to reduce the value of the currency. If domestic interest rates fall relative to elsewhere, it becomes less attractive to save money in domestic banks.
Therefore, it will lead to outflow of foreign currency and therefore, cause a slide of Indian Rupee.
Options (a), (b), and (c) would help strengthen the rupee by increasing foreign exchange inflows or reducing outflows.
Following an expansionary monetary policy would not stop the slide of the Indian rupee; rather it would worsen it → Option (d).