Question

Identify, which of the following is not a source of demand for foreign exchange for the Indian economy?

• A. Import of goods and services
• B. Remittances by foreigners living in India to their families abroad.
• C. Indian tourists visiting foreign countries
• D. Loans from Rest Of the World (ROW)

Hint:

A simple rule: If money is flowing OUT of India, it creates DEMAND for foreign exchange. If money is flowing INTO India, it creates SUPPLY of foreign exchange.

Answer 1

The Correct Option is D

Step 1: Understanding the Concept:
Demand for foreign exchange arises when there is an outflow of currency from the country to make payments abroad. In contrast, the supply of foreign exchange is created by an inflow of currency from abroad. The question asks which option does not create a demand (i.e., is not an outflow).

Step 2: Detailed Explanation:
Let's analyze each option from the perspective of the Indian economy: \begin{itemize} \item (A) Import of goods and services: To pay for imports, Indians need foreign currency (e.g., US dollars). This creates a demand for foreign exchange. \item (B) Remittances by foreigners living in India to their families abroad: A foreigner working in India and sending money home needs to convert Indian Rupees into their home currency. This is an outflow of currency and creates a demand for foreign exchange. \titem (C) Indian tourists visiting foreign countries: Indian tourists need foreign currency to spend abroad. This creates a demand for foreign exchange. \item (D) Loans from Rest Of the World (ROW): When India receives a loan from another country or an institution like the World Bank, foreign currency flows into the country. This is an inflow, which increases the supply of foreign exchange, not the demand for it. \end{itemize}

Step 3: Final Answer:
Receiving loans from the rest of the world is a source of supply of foreign exchange, not a source of demand. Therefore, option (D) is the correct answer.