NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis
A widening current account deficit in India, all else equal, would most likely exert which pressure on the rupee?
A widening current account deficit tends to put depreciation pressure on the rupee. The country needs more foreign currency to pay for imports and services than it earns, so demand for foreign exchange outstrips supply unless offset by capital inflows.
- ADepreciation pressure, because demand for foreign currency exceeds its supplyCorrect
- BAppreciation pressure, because imports are rising
- CNo pressure, because the capital account always offsets it
- DAppreciation pressure, because exports are falling
Explanation
A larger current account deficit means more foreign exchange is needed to pay for imports and other payments than is earned. Unless financed by capital inflows, higher demand for foreign currency weakens the rupee. Falling exports or rising imports do not strengthen it.
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