India trades with many countries. It buys crude oil, machinery and electronic goods from abroad, and sells textiles, jewellery, medicines and software services to other countries. Indians working abroad send money home to their families. Foreign companies set up factories in India and buy shares of Indian companies, while Indian firms borrow from banks abroad. All such dealings of India with other countries during a year are summed up in its balance of payments. When India spends more abroad than it earns from its sales to the rest of the world, the gap has to be met by borrowing abroad, by selling assets, or by using the foreign exchange reserves held by the Reserve Bank of India.
A foreign company buys shares of an Indian company. What is the effect of this on the foreign exchange market in India?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Supply of foreign exchange increases
The foreign company pays for the shares with its own currency, which is changed into rupees. When foreigners buy assets of the home country, foreign currency flows in, so the supply of foreign exchange rises.
NCERT (2026-27): “Supply of Foreign Exchange Foreign currency flows into the home country due to the following reasons: exports by a country lead to the purchase of its domestic goods and services by the foreigners; foreigners send gifts or make transfers; and, the assets of a home country are bought by the foreigners. …” |