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Q65 (IAS/2019) Economy › External Sector & Trade › Currency and financial crises Official Key

In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis? 1. The foreign currency earnings of India's IT sector 2. Increasing the government expenditure 3. Remittances from Indians abroad Select the correct answer using the code given below.

Result
Your answer: —  ·  Correct: B
Explanation

The correct answer is option B (1 and 3 only) because foreign currency earnings from India's IT sector and remittances from Indians abroad both contribute to reducing currency crisis risk, while increasing government expenditure does not.

Foreign currency flows into the home country due to exports of goods and services by a country, gifts or transfers from foreigners, and purchase of home country assets by foreigners[1]. India's IT sector exports services and earns foreign exchange, which strengthens the supply of foreign currency and reduces vulnerability to currency crises.

India is the largest recipient of remittances in the world, receiving around $100 billion in 2022, and the balance of invisibles has always been positive because India has always been a net exporter of services[3]. These remittances provide a steady inflow of foreign exchange, cushioning against currency volatility.

However, increasing government expenditure does not reduce currency crisis risk. Infrastructure spending and strengthening of private consumption contribute to raising the current account (CA) deficit[4], which actually increases demand for foreign currency and can worsen the balance of payments position. Therefore, statements 1 and 3 are correct contributors to reducing currency crisis risk, making option B the correct answer.

Sources
  1. [1] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Supply of Foreign Exchange > p. 91
  2. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 2. Balance of Invisibles > p. 473
  3. [3] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Another case: > p. 108
  4. [4] https://www.elibrary.imf.org/view/journals/002/2025/054/article-A001-en.xml
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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis? 1. The…
At a glance
Origin: Mixed / unclear origin Fairness: Moderate fairness Books / CA: 6.7/10 · 0/10
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This is a classic 'Macroeconomic Stability' question testing the Twin Deficit link. It moves beyond rote memorization of BoP components to their functional impact on currency stability. If you understood the causes of the 1991 crisis (high fiscal deficit leading to external crisis), this was a sitter.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Do the foreign currency earnings of India's IT sector contribute to reducing the risk of a currency crisis in India?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Supply of Foreign Exchange > p. 91
Presence: 5/5
“Foreign currency flows into the home country due to the following reasons: exports by a country lead to the purchase of its domestic goods and services by the foreigners; foreigners send gifts or make transfers; and, the assets of a home country are bought by the foreigners. A rise in price of foreign exchange will reduce the foreigner's cost (in terms of USD) while purchasing products from India, other things remaining constant. This increases India's exports and hence supply for foreign exchange may”
Why this source?
  • Explains that exports bring foreign currency into the home country, increasing supply of foreign exchange.
  • By increasing foreign exchange supply, exports (including services like IT) relieve pressure on the currency market.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > LESS DEVELOPED COUNTRIES OFTEN DEVALUE THEIR CURRENCY, IS IT TRUE? > p. 495
Presence: 4/5
“Yes, Less Developed Countries often devalue their currency because: • Devaluation by the government raises the demand of domestically produced goods and services and thereby exports are expected to rise. • Rise of exports helps to raise foreign exchange flow which as a result facilitates imports of essential items. • Devaluation also attracts private foreign investment into the economy which enables a better GDP growth. In July 1991 the Indian government devalued the rupee by between 18 and 19 per cent to overcome the BOP Crisis. Black Wednesday occurred in the United Kingdom in 1992. December Mistake occurred in Mexico in 1994.”
Why this source?
  • States that rising exports raise foreign exchange flow and help overcome a BOP crisis.
  • Links higher export earnings to improved ability to finance imports and attract investment, reducing crisis risk.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > After 1993: > p. 40
Presence: 4/5
“If the opposite happens and investors start leaving India then they will sell their investments in India in Rupee and purchase the foreign currency which will lead to increase in demand of foreign currency and the Rupee will start depreciating. Let us take another example to understand why Rupee depreciated against Dollar continuously after 1993: Suppose the Nominal Exchange Rate is $ 1 = Rs. 40 • Col1: Burger Price; India: Rs. 20; US: $1 In this case US will import the burgers from India as in $1 they will get Rs. 40 and in Rs. 40 they will get 2 burgers in India, so India will export burgers to US.”
Why this source?
  • Illustrates how capital outflows increase demand for foreign currency and cause rupee depreciation.
  • Implies that foreign currency inflows (from exports/services) counteract such depreciation pressures.
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