Question

Q. Which of the following might lead to the depreciation of the Rupee against the dollar?

Select the correct answer using the code given below.

• A. 1 and 2 only
• B. 1, 2 and 3 only
• C. 1, 3 and 5 only
• D. 1, 3, 4 and 5 only

Answer 1

The correct option is D 1, 3, 4 and 5 only

Explanation:

• Depreciation happens when the demand for a particular currency doesn't match the supply and is usually driven by market forces. This leads to the loss of value of the currency.
• Lower interest rates in India might lead to an outflow of capital seeking better returns and hence can lead to depreciation of the rupee. The rate hikes by the US Federal Reserve have this impact which creates more demand for dollars and hence depreciation of the rupee.
• An increase in inflation would increase the export prices and also reduce the real returns on investment. This would lead to depreciation. The decrease in inflation has the opposite effect.
• An increase in the Current account deficit shows that imports are more than exports. Since the imports are paid in foreign currency, without sufficient exports, the rupee will depreciate.
• A high fiscal deficit will lead to the lowering of the sovereign ratings and hence reduce the demand for domestic currency in the international markets. This will lead to the depreciation of the currency.