Mindyard | The depreciation of an economy’s currency is not a matter of concern in itself. The decline in value against major currencies has to be viewed in the context of macroeconomic factors. The recent depreciation of the Indian rupee in a case in point. The rupee has been depreciating for a long time. What are of concern now are the rate at which the depreciation is occurring and the underlying factors causing the change. The Russia-Ukraine war has disrupted supply chains causing commodity prices to rise, leading to a worldwide hardening of inflationary trends. This, in turn, has caused major central banks to raise interest rates, forcing investors back to the safe haven of the US dollar. For India, these headwinds from the global economy have caused several problems. The rise in international prices, especially of crude oil, has led to a higher import bill and, hence, a greater demand for dollars. Higher interest rates in developed country markets have caused a significant outflow of portfolio investments from India, aggravating the already climbing demand for dollars from a rising import bill. By May 2022, foreign institutional investors had pulled out Rs. 1.50 lakh crore from Indian markets. In the face of these pressures, the rupee, left to itself, would decline in value as the rupee-price of a dollar would increase substantially. One way the Reserve Bank of India could stem the tide would be to sell of dollars in the market to ease the supply situation. However, this would mean that while the value of the rupee could be contained, the nation’s foreign exchange kitty would start to erode further. The RBI has been doing exactly that. The challenge before the RBI is this: how much to let the rupee depreciate and how much to intervene to prop it up? Too much depreciation would raise domestic inflation rates as the rupee-price of imports, especially oil, would raise costs of production. It could trigger a rise in policy-controlled interest rates while closely monitoring inflationary expectations. The biggest challenge is to navigate unpredictable international economic shocks in the near future. The Indian economy’s health is not exactly at its best. Exports may not be able to take advantage of a falling rupee since international demand is expected to stagnate. India’s growth and employment situation are yet to stabilise to what they were about a decade ago. The RBI has difficult choices: controlling inflation versus stimulating growth and stabilising the rupee without severely diminishing the economy’s foreign exchange kitty. [Extracted, with edits and revisions, from “Stiff test: Editorial on depreciation of rupee & challenges before RBI”, The Telegraph] Which of the following, if true, would most strengthen the author’s arguments for why Indian exports may not be able to take advantage of a falling rupee? Economies across the world are witnessing a slowdown, and in such economies, demand for imports decreases substantially., Economies across the world are booming, and there is an increasing demand for Indian exports., A reduction in the volume of exports would be more than offset by the increased value of dollars that Indian exporters would earn., Countries across the world have managed to find ways to insulate themselves from the effects of the Russia-Ukraine war and will need a lot of Indian imports to sustain their new growth models.

The depreciation of an economy’s currency is not a matter of concern in itself. The decline in value against major currencies has to be viewed in the context of macroeconomic factors. The recent depreciation of the Indian rupee in a case in point. The rupee has been depreciating for a long time. What are of concern now are the rate at which the depreciation is occurring and the underlying factors causing the change. The Russia-Ukraine war has disrupted supply chains causing commodity prices to rise, leading to a worldwide hardening of inflationary trends. This, in turn, has caused major central banks to raise interest rates, forcing investors back to the safe haven of the US dollar. For India, these headwinds from the global economy have caused several problems. The rise in international prices, especially of crude oil, has led to a higher import bill and, hence, a greater demand for dollars. Higher interest rates in developed country markets have caused a significant outflow of portfolio investments from India, aggravating the already climbing demand for dollars from a rising import bill. By May 2022, foreign institutional investors had pulled out Rs. 1.50 lakh crore from Indian markets.

In the face of these pressures, the rupee, left to itself, would decline in value as the rupee-price of a dollar would increase substantially. One way the Reserve Bank of India could stem the tide would be to sell of dollars in the market to ease the supply situation. However, this would mean that while the value of the rupee could be contained, the nation’s foreign exchange kitty would start to erode further. The RBI has been doing exactly that. The challenge before the RBI is this: how much to let the rupee depreciate and how much to intervene to prop it up? Too much depreciation would raise domestic inflation rates as the rupee-price of imports, especially oil, would raise costs of production. It could trigger a rise in policy-controlled interest rates while closely monitoring inflationary expectations. The biggest challenge is to navigate unpredictable international economic shocks in the near future. The Indian economy’s health is not exactly at its best. Exports may not be able to take advantage of a falling rupee since international demand is expected to stagnate. India’s growth and employment situation are yet to stabilise to what they were about a decade ago. The RBI has difficult choices: controlling inflation versus stimulating growth and stabilising the rupee without severely diminishing the economy’s foreign exchange kitty.

[Extracted, with edits and revisions, from “Stiff test: Editorial on depreciation of rupee & challenges before RBI”, The Telegraph]

Which of the following, if true, would most strengthen the author’s arguments for why Indian exports may not be able to take advantage of a falling rupee?

Options

Economies across the world are witnessing a slowdown, and in such economies, demand for imports decreases substantially.

Economies across the world are booming, and there is an increasing demand for Indian exports.

A reduction in the volume of exports would be more than offset by the increased value of dollars that Indian exporters would earn.

Countries across the world have managed to find ways to insulate themselves from the effects of the Russia-Ukraine war and will need a lot of Indian imports to sustain their new growth models.

Correct Answer :

Option A

Economies across the world are witnessing a slowdown, and in such economies, demand for imports decreases substantially.

Solution :

The correct answer is: Economies across the world are witnessing a slowdown, and in such economies, demand for imports decreases substantially.

Step-by-Step Explanation:

1. Understand the Author's Argument:
In the passage, the author states: "Exports may not be able to take advantage of a falling rupee since international demand is expected to stagnate."
Usually, a depreciating currency makes a country's exports cheaper in international markets, which can boost export demand. However, the author argues that India won't benefit from this advantage because global demand is stagnant.

2. Evaluate the Options to Find the Strengthener:
We need to find an option that supports or strengthens the claim that international demand will stagnate or decrease, rendering the cheaper rupee ineffective for boosting exports.

Option 1: "Economies across the world are witnessing a slowdown, and in such economies, demand for imports decreases substantially."
This directly supports the author's premise. If foreign countries are experiencing an economic slowdown, their overall purchasing power and consumer demand drop. Consequently, their demand for imports (which includes Indian exports) decreases significantly. This provides a strong logical backing for why Indian exports cannot leverage the falling rupee.
Option 2: "Economies across the world are booming, and there is an increasing demand for Indian exports."
This contradicts the author's premise by suggesting that international demand is high, which would actually help exports take advantage of the falling rupee.
Option 3: "A reduction in the volume of exports would be more than offset by the increased value of dollars that Indian exporters would earn."
This addresses revenue trade-offs for exporters rather than explaining why global demand for exports remains low/stagnant.
Option 4: "Countries across the world have managed to find ways to insulate themselves from the effects of the Russia-Ukraine war and will need a lot of Indian imports to sustain their new growth models."
This suggests high foreign demand for Indian goods, weakening the author's argument rather than strengthening it.

Conclusion:
Option 1 provides the exact mechanism (global economic slowdown reducing import demand) that strengthens the author's conclusion about stagnant export growth despite currency depreciation.

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