Q. Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of Indian rupee?

• Curbing imports of non-essential goods and promoting exports
• Encouraging Indian borrowers to issue rupee-denominated Masala Bonds
• Easing conditions relating to external commercial borrowing
• Following an expansionary monetary policy

Answer: (d) Following an expansionary monetary policy

Appreciation & Depreciation of Currency

• In a floating exchange rate system, market forces (based on demand and supply of a currency) determine the value of a currency.
• Currency Appreciation: It is an increase in the value of one currency in relation to another currency.
  • Currencies appreciate against each other for a variety of reasons, including government policy, interest rates, trade balances and business cycles.
  • Currency appreciation discourages a country’s export activity as its products and services become costlier to buy.
• Currency Depreciation: It is a fall in the value of a currency in a floating exchange rate system.
  • Economic fundamentals, political instability, or risk aversion can cause currency depreciation.
  • Currency depreciation encourages a country’s export activity as its products and services become cheaper to buy.
• Cause of Currency Depreciation:
  • Trade Imbalance: A country experiencing a trade deficit, where imports exceed exports, may see its currency depreciate as demand for foreign currencies increases to pay for the excess imports.
  • Inflation: Higher inflation rates compared to other countries can lead to currency depreciation. Inflation erodes the purchasing power of a currency, reducing its value relative to other currencies.
  • Interest Rates: Lower interest rates in a country can make its currency less attractive to foreign investors, leading to a decrease in demand and depreciation.
  • Political and Economic Stability: Political instability, economic uncertainty, or unfavourable government policies can undermine investor confidence and cause currency depreciation.
  • Speculation: Speculators anticipating currency depreciation may sell off the currency, leading to its devaluation in the foreign exchange market.
  • Capital Outflows: When investors move their capital out of a country due to perceived risks or better investment opportunities elsewhere, it can result in a depreciation of the country’s currency.
• Impacts of Depreciation of Currency: 
  • Export Competitiveness: A depreciated currency can make a country’s exports more affordable and competitive in international markets, potentially boosting export volumes and improving the trade balance.
  • Import Cost Increase: Depreciation leads to increased costs for imported goods, as the country’s currency now has less purchasing power. This can contribute to higher inflation and impact the affordability of imported products.
  • Current Account Balance: A currency depreciation can help improve a country’s current account balance by reducing imports and increasing exports, potentially leading to a positive impact on the overall balance of payments.
  • Foreign Debt Burden: If a country has significant foreign debt denominated in foreign currencies, currency depreciation can increase the burden of servicing that debt, as it now requires more domestic currency to make the same payments.
  • Inflationary Pressure: Currency depreciation can contribute to inflationary pressures by increasing the cost of imported goods and raw materials. This, in turn, can impact consumer purchasing power and overall price levels within the economy.
  • Tourism and Foreign Investment: Currency depreciation can make a country a more attractive destination for tourists and foreign investors, as their spending power increases in relation to the depreciated currency.