Question

Which of the following steps can be taken by the RBI and the government to stabilise the currency markets.

1. Increasing the limit for outbound investment and remittances from India.

2. Using local currency for trade with major trading partners.

3. Liberalisation of FDI norms

Select the correct answer code

1. 1 and 2 
2. 2 and 3
3. 1 and 3
4. 1, 2 and 3

Answer 1

Correct Answer - Option 2 : 2 and 3

The correct answer is 2 and 3.

• To reduce capital outflow, RBI can reduce the limit for outbound investment and remittances from India. Hence, Statement 1 is NOT correct.
• The government can explore the possibility of using local currency for trade with major trading partners to reduce the trade deficit. Hence, Statement 2 is correct.
• The government can liberalize the FDI limits to encourage capital inflows. Hence, Statement 3 is correct.

• What is a Foreign Exchange Intervention?
  • A foreign exchange intervention is a monetary policy tool used by a central bank.
  • When the central bank takes an active, participatory role in influencing the monetary fund's transfer rate of the national currency.
  • It usually does so with its own reserves or its own authority to generate the currency.
  • Central banks, especially those in developing countries, intervene in the foreign exchange market in order to build reserves for themselves or provide them to the country's banks.
  • Their aim is often to stabilize the exchange rate.