Civil Services Prep

Prelims 2019 · Economy · Question 26

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

  1. Curbing imports of non-essential goods and promoting exports
  2. Encouraging Indian borrowers to issue rupee denominated Masala Bonds
  3. Easing conditions relating to external commercial borrowing
  4. Following an expansionary monetary policy

Answer

Following an expansionary monetary policy

  • (a) Curbing non-essential imports and promoting exports improves the current account balance and reduces pressure on the rupee. Likely measure.
  • (b) Masala Bonds are rupee-denominated; exchange-rate risk is borne by investors, and they can attract foreign capital without increasing currency mismatch for Indian borrowers. Likely measure.
  • (c) Easing external commercial borrowing norms can increase foreign currency inflows and support the rupee in the short term. Likely measure.
  • (d) An expansionary monetary policy usually means lower interest rates/higher liquidity, which can weaken the currency by reducing foreign capital attraction and increasing inflationary pressure. Not the likely measure.
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