In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis?
- The foreign currency earnings of India’s IT sector
- Increasing the government expenditure
- Remittances from Indians abroad
Select the correct answer using the code given below:
[UPSC Civil Services Exam – 2019 Prelims]
(a) 1 only
(b) 1 and 3 only
(c) 2 only
(d) 1, 2 and 3
Answer: (b)
Explanation:
- A currency crisis involves the sudden and steep decline in the value of a nation’s currency, which causes negative ripple effects throughout the economy.
- Central banks and governments can intervene to help stabilize a currency by selling off reserves of foreign currency or gold, or by intervening in the forex markets.
- This decline in value negatively affects an economy by creating instabilities in exchange rates, meaning that one unit of a certain currency no longer buys as much as it used to in another currency.
- Foreign currency earnings and Remittances contribute to the strengthening of the rupee. Hence Statements 1 and 3 are Correct.
- Increasing government Expenditure will have no effect on the value of the currency. Hence Statement 2 is Not Correct.
