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If supply of foreign currency rises in response to a rise in its exchange rate then why appreciation of foreign currency induces fdi?
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If supply of foreign currency rises in response to a rise in its excha...
Rise in exchange rate of a foreign currency refers to appreciation of foreign currency in relation to domestic currency.
It causes a rise in supply of foreign currency owing to the following situations:
(i) It induces greater Foreign Direct Investment (FDI).
(ii) Appreciation of foreign currency induces greater exports from the domestic economy.
(iii) Appreciation of foreign currency increases direct purchase by the non-residents in the domestic economy.
(iv) It also increases remittances from abroad.
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Read the following case study paragraph carefully and answer the question based on the same.The central bank of India i.e. Reserve Bank of India is the apex institution that controls the entire financial market. It’s one of the major functions is to maintain the reserve of foreign exchange. Also, it intervenes in the foreign exchange market to stabilize the excessive fluctuation in the foreign exchange rate.In other words, it is the central bank’s job to control a country’s economy through monetary policy; if the economy is moving slowly or going backward, there are steps that the central bank can take to boost the economy. These steps, whether they are asset purchases or printing more money, all involve injecting more cash into the economy. The simple supply and demand economic projection occurs and currency will devalue.When the opposite occurs, and the economy is growing, the central bank will use various methods to keep that growth steady and in-line with other economic factors such as wages and prices. Whatever the central bank does or doesn’t do, will affect the currency of that country. Sometimes, it is within the central bank’s interest to purposefully affect the value of a currency. For example, if the economy is heavily reliant on exports and their currency value becomes too high, importers of that country’s commodities will seek cheaper supply; hence directly affecting the economy.Q. Which of the following steps should be taken by the central bank if there is an excessive rise in the foreign exchange rate?

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If supply of foreign currency rises in response to a rise in its exchange rate then why appreciation of foreign currency induces fdi?
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