Which of the following are true?
(A) A rise in the interest rates at home often leads to a depreciation of the domestic currency.
(B) If an Indian expects the rupee to depreciate in the near future, he will exchange rupees for dollars today and convert the dollars back to rupees after the rupee depreciates.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (B) is true, (A) is not
(A) A rise in the interest rates at home often leads to a depreciation of the domestic currency. — Incorrect. Higher interest at home draws foreign funds in. Demand for the domestic currency rises, so it appreciates.
(B) If an Indian expects the rupee to depreciate in the near future, he will exchange rupees for dollars today and convert the dollars back to rupees after the rupee depreciates. — Correct. If the rupee will fall, the dollar will rise. Holding dollars now and selling them later gives more rupees. This is speculation.
NCERT (2026-27): “Interest Rates and the Exchange Rate … Thus, a rise in the interest rates at home often leads to an appreciation of the domestic currency. …” “Speculation Money in any country is an asset. If Indians believe that British pound is going to increase in value relative to the rupee, they will want to hold pounds. Thus exchange rates also get affected when people hold foreign exchange on the expectation that they can make gains from the appreciation of the currency. This expectation in turn can actually affect the exchange rate in the following way. If the current exchange rate is Rs. 80 to a pound and investors believe that the pound is going to appreciate by the end of the month and will be worth Rs.85, investors think if they gave the dealer Rs. 80,000 and bought 1000 pounds, at the end of the month, they would be able to exchange the pounds for Rs. 85,000, thus making a profit of Rs. 5,000. …” |