Which of the following events will definitely lead to appreciation of the Indian rupee?
1. Restriction on foreign portfolio investments (FPI) in India
2. Import restriction on luxury goods
3. Uses of global depository receipts
4. Full capital account convertibility
Select the correct answer using the code given below:
(a) 1, 2 and 3 only
(b) 2 and 3 only
(c) 2, 3 and 4 only
(d) 3 and 4 only
Explanation Point 1 is not correct: Restriction on FPI investments in India will decrease inflow of foreign currency into the Indian economy. Reduction in availability of foreign currency will lead to depreciation of rupee.
Point 2 is correct: Imposing restrictions on the import of luxury goods can reduce the demand for foreign exchange (as fewer foreign currencies are needed to pay for imports). This reduction in demand can lead to an appreciation of the rupee.
Point 3 is correct: Depository Receipts (DRs) are instruments that allow Indian companies to raise capital from foreign investors. The issuance of GDRs brings foreign capital into India, increasing the demand for the rupee and potentially leading to its appreciation.
Point 4 is not correct: Implementing full capital account convertibility allows for unrestricted movement of capital in and out of the country. While this can increase foreign investments, it also makes the economy more susceptible to volatile capital flows, which can lead to currency volatility. The net effect on the rupee would depend on various factors, including investor confidence and macroeconomic stability.
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