"First of all I would look at it as not rupee sliding, I would look at it as dollar strengthening, dollar strengthening incessantly" said Nirmala Sitaraman after attending the Annual meetings of the IMF and the world Bank

Based on the above passage, answer the questions mentioned below :

An MNC has decided to shift their production base from China to India. What impact will this shift have on Foreign exchange rate ?

Foreign exchange rate will decrease

The correct answer is option (2) : Foreign exchange rate will decrease

If the production shift attracts more foreign investment into India, it may increase the demand for the Indian currency, causing an appreciation of rupee vis a vis other currency. This, in turn, would lead to a decrease in the foreign exchange rate.

Note: Increase in exchange rate implies that the price of foreign currency (dollar) in terms of domestic currency (rupees) has increased. This is called Depreciation of domestic currency (rupees) in terms of foreign currency (dollars).

Similarly, in a flexible exchange rate regime, when the price of domestic currency (rupees) in terms of foreign currency (dollars) increases, it is called Appreciation of the domestic currency (rupees) in terms of foreign currency (dollars). It implies a decrease in exchange rate. This means that the value of rupees relative to dollar has risen and we need to pay fewer rupees in exchange for one dollar.