Question

A surge in foreign capital inflows in India would lead to the ______________________.

• A. Sale of foreign exchange by the central bank in order to prevent depreciation of rupee.
• B. Purchase of foreign exchange by the central bank in order to prevent depreciation of the rupee.
• C. Sale of foreign exchange by the central bank to prevent the appreciation of the rupee.
• D. Purchase of foreign exchange by the central bank in order to prevent appreciation of the rupee.

Answer 1

The correct option is D Purchase of foreign exchange by the central bank in order to prevent appreciation of the rupee.

A managed floating exchange rate is an exchange rate system that allows a nation’s central bank to intervene regularly in foreign exchangemarkets to change the direction of the currency’s float and/or reduce the amount of currency volatility. This exchange rate system is also known as a “dirty float”.