NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis
A widening current account deficit, with no change in other factors, is most likely to exert which pressure on the domestic currency?
A widening current account deficit tends to put depreciation pressure on the rupee. The country needs more foreign currency for imports and other payments than it earns, so demand for foreign currency exceeds supply unless capital inflows offset the gap.
- ADepreciation pressure, as demand for foreign currency exceeds its supplyCorrect
- BAppreciation pressure, as foreign currency supply rises
- CNo pressure, since the capital account always offsets it exactly
- DAppreciation pressure, as exports exceed imports
Explanation
A larger current account deficit means the country pays out more foreign currency than it earns, raising demand for foreign currency relative to supply and putting downward pressure on the rupee unless offset by capital inflows. Exports exceeding imports would describe a surplus, not a deficit.
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