Comprehension
The depreciation of an economy’s currency is not a matter of concern in itself. The decline in value against major currencies has to be viewed within a set of macroeconomic factors. The recent depreciation of the Indian rupee is a case in point. The rupee has been depreciating for a long time. What are of concern now are the rate at which the depreciation is occurring and the underlying factors causing the change. The Russia-Ukraine war has disrupted supply chains causing commodity prices to rise, leading to a worldwide hardening of inflationary trends. This, in turn, has caused major central banks to raise interest rates, forcing investors back to the safe haven of the US dollar. For India, these headwinds from the global economy have caused several problems. The rise in international prices, especially of crude oil, has led to a higher import bill and, hence, a greater demand for dollars. Higher interest rates in developed country markets have caused a significant outflow of portfolio investments from India, aggravating the already climbing demand for dollars from a rising import bill. By May 2022, foreign institutional investors had pulled out Rs. 1.50 lakh crore from Indian markets.
In the face of these pressures, the rupee, left to itself, would decline in value as the rupee-price of a dollar would increase substantially. One way the Reserve Bank of India could stem the tide would be to sell off dollars in the market to ease the supply situation. However, this would mean that while the value of the rupee could be contained, the nation’s foreign exchange kitty would start to erode further. The RBI has been doing exactly that. The challenge before the RBI is this: how much to let the rupee depreciate and how much to intervene to prop it up? Too much depreciation would raise domestic inflation rates as the rupee-price of imports, especially oil, would raise costs of production. It could trigger a rise in policy-controlled interest rates while closely monitoring inflationary expectations. The biggest challenge is to navigate unpredictable international economic shocks in the near future. The Indian economy’s health is not exactly at its best. Exports may not be able to take advantage of a falling rupee since international demand is expected to stagnate. India’s growth and employment situations are yet to stabilise to what they were about a decade ago. The RBI has difficult choices: controlling inflation versus stimulating growth and stabilising the rupee without severely diminishing the economy’s foreign exchange kitty.
[Extracted, with edits and revisions, from “Stiff test: Editorial on depreciation of rupee & challenges before RBI”, The Telegraph]
In the face of these pressures, the rupee, left to itself, would decline in value as the rupee-price of a dollar would increase substantially. One way the Reserve Bank of India could stem the tide would be to sell off dollars in the market to ease the supply situation. However, this would mean that while the value of the rupee could be contained, the nation’s foreign exchange kitty would start to erode further. The RBI has been doing exactly that. The challenge before the RBI is this: how much to let the rupee depreciate and how much to intervene to prop it up? Too much depreciation would raise domestic inflation rates as the rupee-price of imports, especially oil, would raise costs of production. It could trigger a rise in policy-controlled interest rates while closely monitoring inflationary expectations. The biggest challenge is to navigate unpredictable international economic shocks in the near future. The Indian economy’s health is not exactly at its best. Exports may not be able to take advantage of a falling rupee since international demand is expected to stagnate. India’s growth and employment situations are yet to stabilise to what they were about a decade ago. The RBI has difficult choices: controlling inflation versus stimulating growth and stabilising the rupee without severely diminishing the economy’s foreign exchange kitty.
[Extracted, with edits and revisions, from “Stiff test: Editorial on depreciation of rupee & challenges before RBI”, The Telegraph]
Question: 1
Which of the following is the author most likely to agree with?
Which of the following is the author most likely to agree with?
Updated On: Aug 2, 2024
- It is a major cause for concern if an economy’s currency is depreciating.
- Currency depreciation is not a reason for worry in itself, but if macroeconomic factors are not good, there may be a cause for concern
- The fact that the Indian rupee is witnessing a decline in value against major currencies is very worrisome
- A central bank must always do everything in its power to stem the slightest depreciation of an economy’s currency.
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The Correct Option is B
Solution and Explanation
The correct option is (B): Currency depreciation is not a reason for worry in itself, but if macroeconomic factors are not good, there may be a cause for concern.
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Question: 2
Based on the author’s arguments, which of the following, if true, would reduce the decline in value of the rupee?
Based on the author’s arguments, which of the following, if true, would reduce the decline in value of the rupee?
Updated On: Aug 2, 2024
- Appointing a new Governor for the RBI who has a better sense of how to control inflationary trends.
- A steep increase in commodity prices and the continued disruption of supply chains
- A reduction in worldwide inflationary trends and the reduction of interest rates in developed country markets
- The RBI buying as many dollars as possible from the market.
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The Correct Option is C
Solution and Explanation
The correct option is (C): A reduction in worldwide inflationary trends and the reduction of interest rates in developed country markets.
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Question: 3
Which of the following, if true, would most weaken the author’s arguments?
Which of the following, if true, would most weaken the author’s arguments?
Updated On: Aug 16, 2024
- The Indian economy has been affected by global inflationary trends and the increase of interest rates in developed country markets.
- Since developed country markets have increased their interest rates, global investors have pulled their investments out of other economies, and routed them to such developed country markets
- As the demand for US dollars increases, it is likely the rupee-price of a dollar would increase substantially.
- The Indian economy and currency are highly protected and have been insulated from the effects of global inflationary trends and the increase of interest rates in developed country markets.
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The Correct Option is D
Solution and Explanation
The correct option is (D): The Indian economy and currency are highly protected and have been insulated from the effects of global inflationary trends and the increase of interest rates in developed country markets.
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Question: 4
The Indian economy and currency are highly protected and have been insulated from the effects of global inflationary trends and the increase of interest rates in developed country markets.
The Indian economy and currency are highly protected and have been insulated from the effects of global inflationary trends and the increase of interest rates in developed country markets.
Updated On: Aug 1, 2024
- Economies across the world are witnessing a slowdown, and in such economies, demand for imports decreases substantially.
- Economies across the world are booming, and there is an increasing demand for Indian exports
- A reduction in the volume of exports would be more than offset by the increased value of dollars that Indian exporters would earn.
- Countries across the world have managed to find ways to insulate themselves from the effects of the Russia-Ukraine war and will need a lot of Indian imports to sustain their new growth models.
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The Correct Option is A
Solution and Explanation
The correct option is (A): Economies across the world are witnessing a slowdown, and in such economies, demand for imports decreases substantially.
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Question: 5
Based on the author’s arguments, which of the following must necessarily be true?
Based on the author’s arguments, which of the following must necessarily be true?
Updated On: Aug 4, 2024
- The continuing depreciation of the Indian rupee at its current rate, coupled with worldwide inflationary trends, would result in immense political instability in India, and consequently, in all of South Asia.
- If nothing else is done, the rise of interest rates in developed country markets, coupled with hardening of inflationary trends across the world, will result in a fall in the value of the rupee against the dollar.
- If inflationary trends continue to harden across the world, and if interest rates in developed country markets continue to rise, portfolio investors will increase their investments in India, and this will have a positive impact on India’s foreign exchange reserves
- If nothing else is done, the rise of interest rates in developed country markets, coupled with hardening of inflationary trends across the world, will result in a rise in the value of the rupee against the dollar.
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The Correct Option is B
Solution and Explanation
The correct option is (B): If nothing else is done, the rise of interest rates in developed country markets, coupled with hardening of inflationary trends across the world, will result in a fall in the value of the rupee against the dollar.
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Question: 6
Which of the following is the author most likely to agree with?
Which of the following is the author most likely to agree with?
Updated On: Aug 1, 2024
- The RBI must not focus solely on preventing the depreciation of the rupee, as that may result in negative impacts on other aspects of the economy.
- The RBI must focus solely on preventing the depreciation of the rupee at all costs, since it is by far the most important indicator of the health of the Indian economy
- Periodic inflationary trends are normal in any economy, and the RBI need not worry about the inflationary effects in the Indian economy caused by the depreciation of the rupee.
- The RBI need not do anything to reduce the rate of depreciation of the rupee, since the depreciation of an economy’s currency is not a matter of concern in itself.
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The Correct Option is A
Solution and Explanation
The correct option is (A): The RBI must not focus solely on preventing the depreciation of the rupee, as that may result in negative impacts on other aspects of the economy.
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His subject-matter will be determined by the age he lives in — at least this is true in tumultuous, revolutionary ages like our own — but before he ever begins to write he will have acquired an emotional attitude from which he will never completely escape. It is his job to discipline his temperament, but if he escapes from his early influences altogether, he will have killed his impulse to write. I think there are four great motives for writing, at any rate for writing prose. They are: (i) Sheer egoism: Desire to seem clever, to be talked about, to be remembered after death, to get your own back on grown-ups who snubbed you in childhood; (ii) Aesthetic enthusiasm: Desire to share an experience which one feels is valuable and ought not to be missed (iii) Historical impulse: Desire to see things as they are, to find out true facts and store them up for the use of posterity (iv) Political purpose: Desire to push the world in a certain direction, to alter other people's idea of the kind of society that they should strive after.
[Extracted with edits from George Orwell's "Why I Write"]- CLAT - 2025
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(Extract with edits from "The right kind of Education" by J. Krishna Murti)- CLAT - 2025
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[Extracted with edits from "Education" by Swami Vivekananda]- CLAT - 2025
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(Extracted with edits from "An Astrologer's Day" by R.K. Narayan)- CLAT - 2025
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