Skip to content

IAI Actuarial Core Principles · Business Economics · Balance of payments and exchange rates

India's central bank sells US dollars from its reserves in the foreign exchange market to slow a rupee depreciation, and does not offset the effect on domestic money. Which outcome best describes the combined effect?

Selling dollars increases dollar supply and slows the rupee's depreciation, but the central bank absorbs rupees in return, so domestic liquidity and money supply fall unless sterilised. Foreign exchange reserves also decline as a result of the intervention.

  1. AThe rupee's fall is slowed, and domestic money supply and liquidity fallCorrect
  2. BThe rupee's fall is slowed, and domestic money supply rises
  3. CThe rupee's fall is accelerated, and domestic liquidity rises
  4. DThe rupee's fall is slowed, and domestic money supply is unaffected
  5. Foreign exchange reserves rise and the rupee appreciates through reduced dollar demand

Explanation

Selling dollars adds dollar supply, supporting the rupee. The central bank takes in rupees in exchange, which reduces rupee liquidity unless sterilised. Reserves fall, not rise, and the money supply is not unaffected.

Did you get it right without looking?

One question tells you little. A timed set on Balance of payments and exchange rates shows your real accuracy, how long you take and where you lose marks.

Practise Balance of payments and exchange ratesFree diagnostic mock

More Balance of payments and exchange rates questions