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 is the author most likely to agree with? The RBI must not focus solely on preventing the depreciation of the rupee, as that may result in negative impacts on other aspects of the economy., The RBI must focus solely on preventing the depreciation of the rupee at all costs, since it is by far the most important indicator of the health of the Indian economy., Periodic inflationary trends are normal in any economy, and the RBI need not worry about the inflationary effects in the Indian economy caused by the depreciation of the rupee., The RBI need not do anything to reduce the rate of depreciation of the rupee, because the depreciation of an economy’s currency is not a major cause of concern in itself.

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 is the author most likely to agree with?

Options

The RBI must not focus solely on preventing the depreciation of the rupee, as that may result in negative impacts on other aspects of the economy.

The RBI must focus solely on preventing the depreciation of the rupee at all costs, since it is by far the most important indicator of the health of the Indian economy.

Periodic inflationary trends are normal in any economy, and the RBI need not worry about the inflationary effects in the Indian economy caused by the depreciation of the rupee.

The RBI need not do anything to reduce the rate of depreciation of the rupee, because the depreciation of an economy’s currency is not a major cause of concern in itself.

Correct Answer :

Option A

The RBI must not focus solely on preventing the depreciation of the rupee, as that may result in negative impacts on other aspects of the economy.

Solution :

Correct Answer: The RBI must not focus solely on preventing the depreciation of the rupee, as that may result in negative impacts on other aspects of the economy.

Step-by-Step Explanation and Logical Reasoning:

1. Understand the Author's Core Argument:
The passage discusses the complex challenges facing the Reserve Bank of India (RBI) due to the depreciation of the Indian rupee, global inflationary pressures, rising crude oil prices, and capital outflows. It explicitly highlights the trade-offs involved in RBI's interventions. Specifically, if the RBI aggressively sells US dollars to prop up the rupee, it depletes the foreign exchange reserves ("kitty"). On the other hand, if the rupee depreciates too much, import costs and domestic inflation rise.

2. Analyze the Passage Clues:
- Near the end of the passage, the author explicitly states: "The RBI has difficult choices: controlling inflation versus stimulating growth and stabilising the rupee without severely diminishing the economy’s foreign exchange kitty."
- This demonstrates that focusing exclusively on one single objective (such as stopping currency depreciation) comes at the expense of other vital economic priorities (such as maintaining foreign exchange reserves, controlling inflation, and stimulating economic growth).

3. Evaluate the Options:
- Option 1 (Correct): "The RBI must not focus solely on preventing the depreciation of the rupee, as that may result in negative impacts on other aspects of the economy." — This aligns directly with the author's message about balancing multiple economic parameters and avoiding single-focus policies that erode reserves or stifle growth.
- Option 2: Claims RBI must focus solely on preventing depreciation at all costs. This directly contradicts the passage, which warns against severely diminishing foreign exchange reserves and stresses the need to balance multiple choices.
- Option 3: Suggests the RBI need not worry about inflation caused by rupee depreciation. This contradicts the text, which identifies rising domestic inflation as a major concern.
- Option 4: Claims the RBI need not do anything to reduce the rate of depreciation. This contradicts the passage, which emphasizes that "What are of concern now are the rate at which the depreciation is occurring..."

Conclusion:
Thus, the author would most likely agree with the statement that the RBI needs a balanced approach rather than focusing solely on stabilizing the rupee.

Get 3 Months FREE trial

Create, conduct, and manage professional online assessments with Mindyard. Perfect for teachers and institutes.

Unlock Our Free Library

You may also like

Study Material

Clat 2019 UG Question Paper with Solution

Clat 2018 UG Question Paper with Solution

Mock Tests

Clat 2019 UG

Clat 2018 UG

Ask AI Tutor