UPSC Prelims 2019 Question:

In the context of India, which of the following factor is/are contributor/contributors to reducing the risk of a currency crisis?

1. The foreign currency earnings of India’s IT sector
2. Increasing the government expenditure
3. Remittances from Indians abroad
   
   

Select the correct answer using the code given below.

Explanation:

• A currency crisis results from a massive balance of payment deficits which results in heavy currency devaluation. Due to this, financial institutions and governments struggle to meet their debt obligations which result in economic crises and inflation.
  
  
• Foreign Exchange Reserves are external assets that are readily available and controlled by monetary authorities (RBI) for direct financing of external payments imbalances, to regulate the currency exchange rates.
  
  
• The foreign currency earnings of India’s IT sector will lead to the inflow of foreign currencies and will increase foreign exchange reserves of India. Hence contribute to reducing the risk of a currency crisis. So, statement 1 is correct.
  
  
• Increasing Government expenditure will not boost foreign exchange reserves and hence does not contribute to mitigating the risk of the currency crisis. So, statement 2 is not correct.
  
  
• Remittances from Indians abroad also increase foreign exchange reserves of India which helps in reducing the risk of a currency crisis. So, statement 3 is correct.
  
  

Therefore, option (2) is the correct answer.

Subject: Economics | Exchange Rate