UPSC Prelims 2019 Q86: Indian Economy – External Sector & Balance Of Payments
- (a) Curbing imports of non - essential goods and promoting exports
- (b) Encouraging Indian borrowers to issue rupee - denominated Masala Bonds
- (c) Easing conditions relating to external commercial borrowing
- (d) Following an expansionary monetary policy
Answer: (d) Following an expansionary monetary policy
Explanation
Measures to Stop Rupee Slide (and What Would NOT Help)
| Option | Effect on Rupee | Assessment |
|---|---|---|
| (a) Curb non-essential imports + promote exports | Improves current account, strengthens rupee | YES - measure taken |
| (b) Encourage Masala Bonds (INR-denominated) | Brings forex without FX risk to India | YES - measure taken |
| (c) Ease ECB conditions | Encourages foreign inflows | YES - measure taken |
| (d) Expansionary monetary policy | WEAKENS rupee further (lower interest rates, outflow of capital) | NO - would WORSEN the slide |
Expansionary monetary policy would WEAKEN the rupee (lower interest rates -> capital outflow -> weaker rupee). So it is NOT a measure to stop the slide.
Answer: (d) Following an expansionary monetary policy.
Why each option is right or wrong
- (a) Incorrect. (as the NOT-a-measure). Curbing non-essential imports IS a standard measure to arrest rupee slide.
- (b) Incorrect. (as the NOT-a-measure). Masala Bonds bring forex to India without exposing Indian borrowers to FX risk.
- (c) Incorrect. (as the NOT-a-measure). Easing ECB norms attracts foreign capital inflows.
- (d) CORRECT. Choice (as the NOT-a-measure). Expansionary monetary policy (lower rates, more money supply) would WEAKEN the rupee further via capital outflows - opposite of what stops the slide.
Key point
To stop rupee slide: curb non-essential imports, promote exports, ease ECB norms, Masala bonds, raise policy rates, sell forex reserves. NOT expansionary monetary policy (which weakens rupee).
Remember
Following an expansionary monetary policy is NOT a measure that the Government/RBI would take to stop the slide of the Indian rupee. Expansionary monetary policy (lower interest rates, more money supply) tends to WEAKEN a currency by encouraging capital outflows. The rupee-defense toolkit includes curbing imports, promoting exports, Masala Bonds, easing ECB norms, and TIGHT monetary policy.
Common mistakes
- Confusing expansionary monetary policy (rate cuts) with tight monetary policy (rate hikes) - opposite effects.
- Assuming any 'stimulative' policy is currency-supportive - stimulus often weakens currency.
- Not knowing RBI typically raises rates and sells USD to defend rupee (contractionary FX intervention).
Exam tip
Rupee defence toolkit: (i) FX intervention (sell USD). (ii) Rate hikes. (iii) NRI deposit incentives. (iv) ECB liberalisation. (v) Import curbs. (vi) Export incentives. (vii) Special swap windows. All opposite of expansionary/loose policy.
Sources
- RBI - Monetary Policy Report and Forex intervention practices
- NCERT Class 12 - Macroeconomics (Open economy chapter)