Under a flexible exchange rate, three of the following add to the supply of foreign exchange in India. Which one is the odd one out?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Indians buy bonds issued by a foreign government
Foreign currency flows into India when foreigners buy Indian goods and services, send gifts or transfers, or buy Indian assets. When Indians buy foreign bonds, foreign currency flows out, so this adds to the demand for foreign exchange, not to its supply.
NCERT (2026-27): “Demand for Foreign Exchange People demand foreign exchange because: they want to purchase goods and services from other countries; they want to send gifts abroad; and, they want to purchase financial assets of a certain country. A rise in price of foreign exchange will increase the cost (in terms of rupees) of purchasing a foreign good. This reduces demand for imports and hence demand for foreign exchange also decreases, other things remaining constant.” “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. …” |