When the exchange rate of foreign currency increases due to managed floating rate it is known as ______.

Devaluation

The correct answer is Option (1) → Devaluation

Devaluation is a deliberate policy decision by a country's government or central bank to officially lower the value of its currency against another currency, a group of currencies, or a standard like gold. This is distinct from depreciation, which is a decrease in a currency's value due to market forces of supply and demand in a floating exchange rate system.

Under a managed floating exchange rate system, the exchange rate is primarily determined by market forces (supply and demand) but occasionally influenced by the central bank’s interventions. Thus, in case when some government action increases the exchange rate (thereby, making domestic currency cheaper) is called Devaluation. 

Note: In this question there is an ambiguity as to how the exchange rate of foreign currency increased in Managed Float System- by market forces or government intervention. In case it is result of market intervention the answer would be depreciation and in case of intervention by government, the answer would be depreciation. As per NTA answer sheet, the answer is devaluation and hence the answer is marked as per NTA.