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Which of the following can lead to rupee depreciation?
- Rising interest rates in the US
- FPI Inflows
- High import intensity
Select the correct code:
- a)1, 2
- b)1, 3
- c)3 only
- d)1, 2, 3
Correct answer is option 'B'. Can you explain this answer?
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Which of the following can lead to rupee depreciation? Rising interest...
Explanation:
Currency depreciation refers to a decrease in the value of a country's currency relative to other currencies. In the given options, the factors that can lead to rupee depreciation are:
1. Rising interest rates in the US:
When interest rates in the US rise, it attracts foreign investors who seek higher returns on their investments. This leads to an increase in capital outflows from countries like India, as investors move their funds to the US. As a result, the demand for Indian rupees decreases, causing its value to depreciate.
2. High import intensity:
If a country has a high import intensity, it means that it relies heavily on imports to meet its domestic demand. When a country imports more than it exports, there is a higher demand for foreign currencies to pay for these imports. This increased demand for foreign currencies can lead to the depreciation of the domestic currency, in this case, the Indian rupee.
3. FPI inflows:
Foreign Portfolio Investment (FPI) refers to investments made by foreign individuals or entities in the financial markets of another country. When there is a significant inflow of FPI into a country, it leads to an increase in the demand for the domestic currency. However, if there is a sudden withdrawal of FPI, it can result in a decrease in the demand for the domestic currency, leading to its depreciation.
Therefore, the correct answer is option 'B' (1, 3) as rising interest rates in the US and high import intensity can both contribute to rupee depreciation. FPI inflows, on the other hand, can have an impact on the currency value but may not necessarily lead to depreciation.
Currency depreciation refers to a decrease in the value of a country's currency relative to other currencies. In the given options, the factors that can lead to rupee depreciation are:
1. Rising interest rates in the US:
When interest rates in the US rise, it attracts foreign investors who seek higher returns on their investments. This leads to an increase in capital outflows from countries like India, as investors move their funds to the US. As a result, the demand for Indian rupees decreases, causing its value to depreciate.
2. High import intensity:
If a country has a high import intensity, it means that it relies heavily on imports to meet its domestic demand. When a country imports more than it exports, there is a higher demand for foreign currencies to pay for these imports. This increased demand for foreign currencies can lead to the depreciation of the domestic currency, in this case, the Indian rupee.
3. FPI inflows:
Foreign Portfolio Investment (FPI) refers to investments made by foreign individuals or entities in the financial markets of another country. When there is a significant inflow of FPI into a country, it leads to an increase in the demand for the domestic currency. However, if there is a sudden withdrawal of FPI, it can result in a decrease in the demand for the domestic currency, leading to its depreciation.
Therefore, the correct answer is option 'B' (1, 3) as rising interest rates in the US and high import intensity can both contribute to rupee depreciation. FPI inflows, on the other hand, can have an impact on the currency value but may not necessarily lead to depreciation.
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