Question map
Which one of the following is not the most likely measure the Government/ RBI takes to stop the slide of Indian rupee?
Explanation
The correct answer is option D because an expansionary monetary policy is not a measure RBI would take to stop the rupee's slide; in fact, it would likely worsen depreciation.
To overcome BOP imbalances and prevent rupee depreciation, the Government/RBI takes measures like devaluation management, export promotion and import control through incentives, subsidies, and import restrictions[1]. Issue of Masala Bonds creates demand for rupee and thus helps in preventing depreciation of currency[2]. Factors contributing to improved BOP situation include increase in software exports, private remittances, Foreign Investment (both FDI and portfolio investment), and rise in Net External Commercial Borrowings[3], showing that easing ECB conditions can help.
However, an expansionary monetary policy increases the economy's money supply through reduced key interest rates and increased market liquidity[4]. This would increase rupee supply in the market, reducing its value and accelerating depreciation rather than stopping it. Credit control measures to decrease money supply help reduce purchasing power and aggregate demand[1], which is the opposite approach to expansionary policy. Therefore, expansionary monetary policy contradicts the objective of stopping rupee depreciation.
Sources- [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > Measures taken by the Government/RBI to overcome BOP Imbalance > p. 484
- [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > MASALA BOND > p. 266
- [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > BOP Situation in Post-Reform Period (1991-92 Onwards) > p. 484
- [4] https://universalinstitutions.com/rbi-and-monetary-policy-in-india/
PROVENANCE & STUDY PATTERN
Full viewThis is a classic 'Conceptual Application' question. While standard books define Masala Bonds and ECBs, the answer relies on understanding the inverse relationship between money supply and currency value. It tests if you can connect 'Expansionary Policy' (Internal) to 'Currency Depreciation' (External).
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Statement 1: Are measures to curb imports of non-essential goods and promote exports used by the Government or RBI to stop the slide of the Indian rupee?
- Statement 2: Is encouraging Indian borrowers to issue rupee-denominated Masala bonds a strategy the Government or RBI uses to prevent depreciation of the Indian rupee?
- Statement 3: Does easing conditions for external commercial borrowing (ECB) serve as a measure the Government or RBI would use to stop the slide of the Indian rupee?
- Statement 4: Would following an expansionary monetary policy be a measure the Reserve Bank of India would use to stop the slide of the Indian rupee?
- Explicitly lists export promotion and import control (export incentives, restrictions through licensing/quota) as measures the Government/RBI uses to overcome BoP imbalance.
- Frames these measures as tools to alter external demand flows, which directly affect foreign exchange availability and exchange-rate pressure.
- Describes how sluggish imports and capital controls have helped raise forex reserves, linking import suppression to improved external balances.
- Explains RBI intervention (sterilisation) in forex markets alongside these external-sector measures to manage exchange-rate outcomes.
- Explains RBI can use foreign exchange (including swap lines) to sell dollars to importers or to build reserves and defend the rupee.
- Connects high importer demand for dollars (from large imports) to rupee depreciation, implying reducing import demand eases depreciation pressure.
- Explicitly defines Masala bonds as rupee‑denominated and links their issuance to increased demand for the rupee.
- States that issuing Masala bonds 'helps in preventing depreciation of currency', directly supporting the statement's mechanism.
- Describes overseas issuance of rupee‑denominated Masala bonds as a step toward internationalisation of the rupee.
- Internationalisation implies greater foreign demand for rupees, which can support the exchange rate and help prevent depreciation.
- Identifies Masala bonds as a component of rupee‑denominated debt raised abroad, showing they are a channel for mobilising rupee resources from foreign investors.
- Being part of rupee‑denominated external borrowing implies these bonds can increase rupee inflows and thereby influence currency demand.
- Notes that a rise in net ECB contributed to an improved Balance of Payments, linking ECB inflows to external position strength.
- Improved BOP and higher foreign currency inflows can bolster forex reserves, which helps defend the rupee against depreciation.
- Places net ECB among significant components affecting the external debt and external balances of the economy.
- Defines ECBs and explains Masala Bonds as rupee‑denominated instruments where investors bear currency risk.
- Shows that promoting rupee‑denominated borrowing (Masala) reduces borrowers' foreign currency demand, potentially lowering pressure on the rupee.
- Demonstrates that ECBs can be structured to alter currency flow dynamics relevant to exchange rate stability.
- Explains that RBI places limits on how much ECB can be raised, identifying ECB rules as a policy lever.
- Implying that easing these restrictions would change capital account flows and could be used to influence exchange rate pressures.
- Connects ECB regulation directly to capital-account convertibility and exchange-rate outcomes.
- Defines what an expansionary monetary policy does (increasing money supply, reducing key interest rates).
- Provides the mechanism (reduced key interest rates and increased market liquidity) that characterizes expansionary policy — relevant to assessing whether RBI would use it to stop a currency slide.
- Describes the actual measure the RBI used to check the rupee’s fall (selling dollars / foreign-exchange intervention).
- Shows RBI intervention in FX markets, indicating a direct tool used to stop rupee depreciation rather than an expansionary monetary policy.
Contains a direct exam question listing 'Following an expansionary monetary policy' as an option that is 'not the most likely measure' to stop the slide of the rupee, indicating that expansionary policy is considered by some sources as unlikely or counterproductive for this goal.
A student could combine this exam-style assertion with basic exchange-rate logic (e.g., policy that lowers domestic rates can reduce capital inflows) to suspect expansionary policy would not arrest currency depreciation.
Explains what adopting an expansionist/expansionary monetary policy entails (e.g., cutting SLR, repo and bank rates) — i.e., the instruments used under expansionary stance.
Knowing the instruments, a student can relate lower domestic interest rates to potential capital outflows or lower attractiveness for foreign investment, which can put downward pressure on the currency.
Defines monetary easing as RBI policy measures to increase money supply, establishing that expansionary policy increases liquidity in the economy.
A student can extend this by applying the standard link between higher money supply / lower rates and possible exchange-rate effects (e.g., depreciation via interest-rate differentials).
States RBI uses monetary policy based on macro/financial assessment and can change stance as circumstances require (i.e., RBI can choose expansionary or contractionary policies depending on objectives).
A student can use this to reason that RBI would select a policy stance (expansionary vs contractionary) that aligns with exchange-rate objectives among other priorities — suggesting expansionary is not obligatory to defend the rupee.
Lists monetary management as a core RBI function — formulation and execution of monetary policy to secure monetary stability and operate the currency/credit system to the country's advantage.
A student can infer RBI would prefer monetary actions that support the currency, and thus consider whether expansionary measures (which affect liquidity and rates) are consistent with that aim.
- [THE VERDICT]: Conceptual Sitter. Solvable purely by logic if you understand basic Macroeconomics (Supply & Demand of currency).
- [THE CONCEPTUAL TRIGGER]: The 'Impossible Trinity' or the conflict between Domestic Growth (Expansionary) and External Stability (Currency Defence).
- [THE HORIZONTAL EXPANSION]: Memorize the 'Rupee Defence Kit': 1) Selling Forex Reserves (Sterilization), 2) Raising Repo Rate (to attract FPI), 3) Easing ECB/FPI limits (Voluntary Retention Route), 4) Encouraging NRI deposits (FCNR-B), 5) Currency Swap Agreements (e.g., with Japan/SAARC).
- [THE STRATEGIC METACOGNITION]: When reading Monetary Policy, always ask the 'If-Then' question: 'If RBI cuts rates, what happens to the Rupee?' (Answer: It weakens due to capital flight). 'If RBI hikes rates, what happens to exports?' (Answer: Rupee strengthens, exports might suffer).
Export incentives and restrictions on non-essential imports are used to improve the balance of payments and relieve exchange-rate pressure.
High-yield for polity/economy questions on measures to correct BoP crises; connects trade policy to macro exchange-rate outcomes and fiscal/administrative instruments. Mastering this helps answer questions on policy responses to currency depreciation and external imbalances.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > Measures taken by the Government/RBI to overcome BOP Imbalance > p. 484
RBI buys/sells foreign currency and neutralises rupee supply via government securities to manage exchange-rate effects.
Critical for understanding monetary-policy tools used in FX management; links central-bank operations to reserves, inflation and exchange stability. Useful for questions on monetary vs. external-sector policy coordination.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > STERILISATION AS A POLICY TOOL OF RBI > p. 498
Central bank can deploy reserves or draw on swap arrangements to supply foreign currency to importers or bolster reserves and defend the rupee.
Essential for questions on crisis management and short-term exchange-rate defence; connects international arrangements (swap lines) with domestic FX stability strategies and current-account pressures.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Currency Swap Agreement between two countries: > p. 102
Masala bonds are rupee‑denominated bonds issued overseas that create demand for the rupee and can be used to support the currency.
High‑yield for UPSC because it links external debt instruments to exchange‑rate management and capital flows. Mastering this helps answer questions on external financing, exchange‑rate impact of foreign borrowing, and policy tools to manage depreciation.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > MASALA BOND > p. 266
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > 8.28 Indian Economy > p. 284
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 164
Issuing rupee bonds abroad is presented as a step toward internationalising the rupee and requires gradual relaxations on capital account convertibility.
Important for questions on currency policy, capital account liberalisation, and India's external integration. Understanding this concept links macro policy, forex management, and long‑term currency strategy.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > Can Indian Rupee be Internationalised? > p. 500
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 164
Central‑bank tools such as selling foreign currency, using currency swap lines, and holding reserves are alternative or complementary ways to defend the rupee alongside instruments like Masala bonds.
Crucial for macro answers on how exchange rates are defended in practice; connects to RBI operations, balance‑of‑payments management, and policy trade‑offs. Enables answering both static‑policy and crisis‑response questions.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Currency Swap Agreement between two countries: > p. 102
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > After 1993: > p. 41
ECB can be raised in foreign currency or rupee and includes instruments like Masala Bonds that shift currency risk to investors.
High-yield for exchange-rate and external finance questions: understanding ECB types clarifies how capital flows affect currency demand and repayment risk. It connects to debt composition, instruments, and policy choices on currency exposure; useful for evaluating measures to defend the rupee.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Debt Instruments > p. 100
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > Types of Loans > p. 479
The 'Impossible Trinity' (Mundell-Fleming Trilemma): A country cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. India manages a 'middle path' with managed float and partial capital account convertibility.
Use the 'Odd One Out' Logic based on Flow Direction. Options A, B, and C all aim to INCREASE the inflow of Dollars or demand for Rupee. Option D (Expansionary Policy) INCREASES the supply of Rupee. Basic Economics: Higher supply = Lower price. Since the goal is to stop the price drop, increasing supply (Option D) is the contradiction.
Mains GS-3 (Indian Economy): This links directly to the 'Growth vs. Stability' debate. Defending the rupee often requires hiking interest rates (tightening), which can choke GDP growth—a classic dilemma for the Monetary Policy Committee (MPC).