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CMA Final · Strategic Financial Management · The International Financial Environment

Under a floating exchange rate regime, which event would, other things equal, most directly cause the Indian rupee to appreciate against the US dollar?

Higher foreign portfolio investment inflows increase demand for rupees because investors must sell foreign currency to buy Indian assets, so the rupee appreciates. The other events increase demand for dollars through imports, dividend remittances or outward investment, which weakens the rupee.

  1. AIncrease in foreign portfolio investment inflows into Indian equitiesCorrect
  2. BA rise in India's crude oil import bill
  3. CLarger repatriation of dividends by foreign companies
  4. DLower US interest rates attracting Indian investors abroad

Explanation

Greater FPI inflows raise demand for rupees as foreign investors sell dollars to buy rupees, appreciating INR. A higher oil import bill, dividend repatriation and Indian outflows to the US all raise demand for dollars and weaken the rupee.

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