CSEET · Economic and Business Environment · Global Environment
Under a market-determined (floating) exchange rate system, the rupee is most likely to depreciate against the US dollar when:
The rupee tends to depreciate when foreign investors sell Indian securities and repatriate funds, because this raises demand for dollars relative to supply. Higher exports, FDI inflows and remittances increase dollar supply in India and would support or appreciate the rupee instead.
- AForeign investors sell Indian securities and take money out of India, raising demand for dollarsCorrect
- BIndia's exports rise sharply, increasing the supply of dollars
- CForeign direct investment into India increases significantly
- DRemittances from Indians abroad rise substantially
Explanation
Depreciation occurs when demand for dollars rises relative to supply. Capital outflows by foreign investors increase demand for dollars as rupee proceeds are converted. The other options raise dollar supply in India and would tend to strengthen the rupee.
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