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Q27 (CDS-I/2013) Economy › External Sector & Trade › Exchange rate dynamics Answer Verified

The sharp depredation of rupee in the Forex market in the year 2011 was due to— 1. flight to safety by foreign investors 2. meltdown in European markets 3. inflation in emerging market economies 4. lag effect of monetary policy tightening Select the correct answer using the codes given below—

Result
Your answer: —  ·  Correct: D
Explanation

The sharp depreciation of the Indian rupee in 2011 was driven by a combination of global and domestic factors. Externally, the Eurozone debt crisis caused a meltdown in European markets, leading to a 'flight to safety' where foreign investors pulled capital out of emerging markets like India to seek refuge in safer assets like the US dollar [3]. Internally, emerging market economies, including India, faced high inflation, which reduced the real value of the currency and necessitated monetary policy tightening [2]. The lag effect of this tightening, combined with a widening current account deficit, further pressured the rupee. Under India's managed floating exchange rate system, these market forces of demand and supply led to a significant decline in the rupee's value as demand for dollars surged while capital inflows reversed [3].

Sources

  1. [1] https://www.iitk.ac.in/doms/MBA_IITK/avantgarde/?p=618
  2. [3] https://documents1.worldbank.org/curated/en/749181542305098752/pdf/Inflation-in-Emerging-and-Developing-Economies-Evolution-Drivers-and-Policies.pdf
  3. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > After 1993: > p. 41
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