Impact of rupee depreciation on the Indian economy is:
1. Export of the country increases.
2. Remittances in the economy will increase.
3. Fiscal deficit decreases.
4. Inflation decreases.
How many of the impacts given above are correct?
(a) Only two
(b) Only three
(c ) All four
(d) None
Explanation Impact 1 is correct:
When the rupee depreciates, Indian goods become cheaper for foreign buyers, leading to an increase in exports. This is because Indian products are more competitively priced in international markets.
Impact 2 is correct:
When the rupee depreciates, the value of remittances sent from abroad increases. Since foreign currencies convert to more rupees, remittances from Indians working abroad will have a greater value in India.
Impact 3 is not correct:
A depreciated rupee may actually increase the fiscal deficit, especially if the country has significant external debt. As the rupee weakens, the cost of servicing foreign-denominated debt rises (interest paid on loans taken), which can worsen the fiscal deficit.
Impact 4 is not correct:
When the rupee depreciates, essential imports such as crude oil, edible oils, machinery, and electronics become more expensive. This increases production costs, leading to cost-push inflation and a general rise in the overall price level.
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