In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis?
1. The foreign currency earnings of India's IT sector
2. Increasing the government expenditure
3. Remittances from Indians abroad

Select the correct answer using the code given below.

1 only

1 and 3 only

2 only

1, 2 and 3

APEDIA

UPSC Prelims

2019 • 02 Jun, 2019 • Paper-1

In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis?
1. The foreign currency earnings of India's IT sector
2. Increasing the government expenditure
3. Remittances from Indians abroad

Select the correct answer using the code given below.

Correct Answer

1 and 3 only

Currency Crisis Dynamics: A currency crisis typically unfolds when a nation faces a severe shortage of foreign exchange reserves to cover its external obligatio......

💡 Analysis & Explanation

Currency Crisis Dynamics ▼

A currency crisis typically unfolds when a nation faces a severe shortage of foreign exchange reserves to cover its external obligations, leading to a sharp, sudden depreciation of its domestic currency.

Factor Evaluation ▼

(1) Robust foreign currency earnings from the IT export sector continuously replenish the nation's dollar reserves. (3) Steady remittances from the Indian diaspora provide a massive, non-debt-creating inflow of foreign exchange. Both inherently buffer the rupee. (2) Conversely, recklessly increasing government expenditure expands the fiscal deficit and often sparks inflation, which can trigger capital flight and actually increase the risk of currency depreciation.

Conclusion ▼

Factors 1 and 3 are structural shock absorbers, indicating option B.

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