In recent times the Indian Rupee (₹) depreciated to an all time low against the US dollar (\). Discuss its imp

Question 23 of 77

Q. In recent times the Indian Rupee (₹) depreciated to an all time low against the US dollar ($). Discuss its impact on India's Imports.

(OR)

'A country with trade deficit cannot have current account surplus in its Balance of Payments.' Do you agree with the given statement? Discuss with reason.

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Part (a)Concept understanding — Currency Devaluation Depreciation

Let’s start with something you already know. Suppose you have ₹100 and you want to buy a toy that costs $2. If the exchange rate is ₹50 =$ 1, you can buy exactly one toy. Now imagine the rate changes to ₹100 = $1. Your ₹100 now buys only$ 1 — you can no longer afford the toy. The rupee has become weaker relative to the dollar. That’s the everyday feeling of a currency losing value.

What is Currency Depreciation?

Depreciation is the fall in the value of one currency in terms of another currency under a flexible (floating) exchange rate system. In this system, the market — supply and demand for currencies — decides the rate. If more people want to sell rupees and buy dollars, the rupee’s price falls. That’s depreciation.

Example: If the rate moves from ₹70/ $to ₹80/$ , the rupee has depreciated. Each dollar now costs more rupees.

Note

Depreciation happens automatically in a floating rate system. It is not a government decision — it’s a market outcome.

What is Currency Devaluation?

Devaluation is the official reduction in the value of a currency by the government or central bank under a fixed exchange rate system. Here, the government pegs the currency to another currency (say, the dollar) and then deliberately lowers that peg.

Example: If the government had fixed ₹70/ $and then announces a new fixed rate of ₹80/$ , that’s devaluation.

Watch out

Many students mix these up. Remember: Depreciation = market-driven fall (floating rate). Devaluation = government-driven fall (fixed rate). The effect is similar — your currency buys less foreign currency — but the cause is different.

Why Does It Matter? The Real Effects

1. Exports become cheaper, imports become costlier

When the rupee depreciates (or is devalued), Indian goods become cheaper for foreigners. A shirt that costs ₹500 earlier cost $10 at ₹50/$ . Now at ₹100/ $, it costs only$ 5. Foreign buyers buy more — exports rise.

But the reverse is painful. An imported laptop that cost $1000 earlier cost ₹50,000. Now it costs ₹1,00,000. Imports become expensive, hurting consumers and industries that rely on foreign raw materials.

2. Impact on the trade balance

If exports rise and imports fall, the trade deficit (exports minus imports) may shrink. But this is not guaranteed — if demand for imports is inelastic (people must buy them anyway), the import bill actually rises in rupee terms.

3. Inflation pressure

Since imported oil, machinery, and components cost more, production costs rise. Firms pass this on to consumers. This is called imported inflation.

4. Debt burden

If India has borrowed in dollars, a weaker rupee means we need more rupees to repay the same dollar debt. This increases the burden on the government and companies.

The Formula (Yes, there is one — but it’s simple)

The NCERT textbook does not give a separate formula for depreciation/devaluation itself. But the concept is tied to the exchange rate:

\text{Exchange Rate} = \frac{\text{Price of domestic currency}}{\text{Price of foreign currency}}

More commonly, we write it as:

\text{₹ per $} = \frac{\text{₹}}{\text{$}}

If this number rises, the domestic currency (₹) has depreciated or been devalued.

There is also the percentage change formula:

\text{Percentage depreciation} = \frac{\text{New rate} - \text{Old rate}}{\text{Old rate}} \times 100

Example: Rate goes from ₹70/ $to ₹80/$ .

\frac{80 - 70}{70} \times 100 = 14.3\%

The rupee has depreciated by 14.3% against the dollar.

Tip

Always check which currency is in the denominator. If the denominator currency strengthens, the numerator currency weakens. A rising ₹/$ rate means the rupee is falling.

A Diagram in Words

Draw a standard supply-and-demand graph for dollars. On the vertical axis, put “₹ per $” (the exchange rate). On the horizontal axis, put “Quantity of$ ”. …

Part (b)Concept understanding — Current Account Deficit

The Current Account Deficit: Spending More Than You Earn, But With a Country

Think of your monthly allowance. If you spend ₹2,000 but only earn ₹1,500, you have a deficit of ₹500. You cover that gap by borrowing from a friend or dipping into savings. A country does the same thing on a massive scale — that's the Current Account Deficit (CAD).

The Everyday Intuition

A country's current account is like its income-and-expenditure diary with the rest of the world. It records three main things:

Goods (exports and imports of physical items — phones, wheat, oil)
Services (IT exports, tourism, shipping)
Transfers (money sent home by workers abroad, foreign aid)

When the total money flowing out for imports, services, and transfers exceeds the money flowing in from exports, services, and transfers, you have a deficit. The country is a net borrower from the world.

Note

A deficit is not automatically "bad." It means the country is consuming or investing more than it produces — which can be fine if the borrowed money goes into productive assets (factories, roads) that generate future income.

The Precise Definition (NCERT Style)

The current account is part of the Balance of Payments (BoP) — the record of all economic transactions between residents of a country and the rest of the world.

\text{Current Account Balance} = (X - M) + (X_{\text{services}} - M_{\text{services}}) + \text{Net Transfers} + \text{Net Income}

Where:

$X$ = Exports of goods
$M$ = Imports of goods
$X_{\text{services}}$ = Exports of services (e.g., Indian IT firms selling software to the US)
$M_{\text{services}}$ = Imports of services (e.g., Indians using Netflix)
Net Transfers = Money received from abroad minus money sent abroad (e.g., remittances from Indians working in the Gulf)
Net Income = Earnings from investments abroad minus payments to foreign investors (e.g., dividends paid to a Japanese company that owns a factory in India)

If this total is negative, the country has a Current Account Deficit.

Why It Matters (The "So What?")

A CAD must be financed. How? By borrowing from abroad or selling assets to foreigners. This shows up on the other side of the BoP — the Capital Account. If a country runs a CAD of $50 billion, it must attract$ 50 billion of foreign investment (FDI, FII, loans) to balance the books.

Three things to watch:

Sustainability — A small CAD (say 2-3% of GDP) is normal for a growing economy like India. A large, persistent CAD (5%+ of GDP) signals trouble: the country is living beyond its means and may struggle to repay.
Currency pressure — To finance a CAD, the country needs foreign currency (dollars). High demand for dollars can weaken the rupee. A weaker rupee makes imports costlier (inflation) but helps exports.
The J-Curve effect — When the rupee depreciates, the trade deficit often worsens initially before improving. Why? Imports are priced in dollars and become more expensive in rupees immediately, while export volumes take time to respond. The graph of the trade balance over time looks like a "J" — dipping first, then rising. …

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Part (a): Rupee depreciation makes imports costlier in Rupee terms; because oil and other essentials are inelastic, the import bill rises in the short run (imported inflation), though non-essential import volumes may fall.

Part (b): False — Current Account = Trade Balance + Net Invisibles, so a trade deficit can coexist with a current account surplus when net invisibles are large enough.

Part (a)

When the Rupee weakens against the dollar (say ₹75 to ₹85 per US dollar), each dollar of imports costs more in Rupees. The chain of effects:

1. Immediate cost increase. India imports crude oil, gold, machinery, electronics and chemicals, typically priced in dollars. An importer who paid ₹75 per dollar now pays ₹85 — a sharp rise in input costs and final prices (imported inflation).

2. Volume effect. Because imported goods are dearer, demand for non-essential imports (electronics, discretionary goods) falls, and firms may substitute domestic alternatives. Gold imports often drop as buyers postpone purchases.

3. Value may still rise in the short run. For inelastic imports like crude oil, quantity barely falls — India must import a certain amount regardless of price. So even if some volumes fall, the total import bill in Rupees typically rises initially.

Note

This is the J-curve effect: after depreciation the trade deficit often worsens first (import bills rise immediately while export volumes take time to adjust) and improves later.

4. Long run. If depreciation is sustained, import-substitution and shifting preferences reduce import volumes, and the import bill may eventually decline.

Effect	Short run	Long run
Price of imports (₹)	Rises sharply	Stays high
Volume of imports	Falls slightly (inelastic barely fall)	Falls more

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 65 on this concept.

CBSE 2026Set 58/1/11 markMCQ
$Q. Read the following statements carefully : Statement 1 : Depreciation of currency is an economic action undertaken by the government of a nation under the fixed exchange rate system. Statement 2 : Under the floating exchange Rate system, authorities actively intervene in the foreign exchange market by way of maintaining foreign exchange reserves. In the light of the given statements, choose the correct option from the following : (A) Statement 1 is true and statement 2 is false. (B) Statement 1 is false and statement 2 is true. (C) Both statements 1 and 2 are true. (D) Both statements 1 and 2 are false.$
›Reveal solutionSolution

Statement 1 confuses depreciation (market-driven) with devaluation (government action under fixed rates); Statement 2 wrongly claims active intervention defines floating systems. Both statements are false.

The question tests whether you can distinguish between two exchange-rate regimes and the vocabulary that goes with each. The key is to understand what governments do versus what markets do in fixed and floating systems.

Fixed vs Floating Exchange Rates: Who Decides?

Under a fixed exchange rate system, the government (or central bank) pegs the domestic currency to another currency or a basket of currencies at a declared rate. The authorities must intervene in the foreign exchange market—buying or selling reserves—to defend that peg whenever market forces push the rate away from the official level. If the government chooses to lower the official value of the currency, that deliberate policy action is called devaluation. Conversely, raising the official value is revaluation. Both are government decisions.

Under a floating (or flexible) exchange rate system, the currency's value is determined by market forces of demand and supply in the foreign exchange market, with no commitment by the government to maintain any particular rate. The exchange rate fluctuates freely. When the currency loses value in the market, we call it depreciation; when it gains value, appreciation. These are market outcomes, not government decisions.

Note

A managed float (or "dirty float") sits between the two extremes: the rate mostly floats, but authorities occasionally intervene to smooth volatility or nudge the rate. India, for instance, operates a managed float—the RBI does not target a fixed rate but may buy or sell dollars to prevent excessive swings.

Evaluating Statement 1

Statement 1 says: "Depreciation of currency is an economic action undertaken by the government of a nation under the fixed exchange rate system."

This mixes up terminology. Under a fixed system, if the government lowers the currency's official value, the correct term is devaluation, not depreciation. Depreciation refers to a market-driven fall in value under a floating system, where the government does not set the rate. The statement incorrectly attributes a government action (which would be devaluation) to the term "depreciation" and places it in the fixed-rate context.

Statement 1 is false.

Evaluating Statement 2 …
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CBSE 2026Set 58/1/11 markMCQ
$Q. Read the following statements : Assertion (A) and Reason (R). Choose the correct option from those given below : Assertion (A) : Unilateral Transfers are recorded in the Current Account of the Balance of Payments (BoP) of a nation. Reason (R) : Capital account records transactions which cause a change in the assets or liabilities of the country. Options : (A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A). (B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A). (C) Assertion (A) is true, but Reason (R) is false. (D) Assertion (A) is false, but Reason (R) is true.$
›Reveal solutionSolution

Both the Assertion (A) and the Reason (R) are true statements regarding the Balance of Payments. However, the Reason (R) defines the Capital Account and does not explain why Unilateral Transfers are recorded in the Current Account.

The Balance of Payments (BoP) is a comprehensive record of all economic transactions between the residents of a country and the rest of the world over a specific period, typically a year. It is divided into two main accounts: the Current Account and the Capital Account. Understanding what each account records is crucial for analyzing a nation's international economic position.

Let's examine Assertion (A): Unilateral Transfers are recorded in the Current Account of the Balance of Payments (BoP) of a nation.

Unilateral transfers are one-sided transactions, meaning they involve no quid pro quo (no return payment or obligation). These include gifts, remittances (money sent by residents working abroad to their home country), grants, and donations. Since these transfers do not create any future claims or liabilities, they are considered current transactions. The Current Account records the flow of goods, services, income, and these unilateral transfers. Therefore, Assertion (A) is true.

Now, let's look at Reason (R): Capital account records transactions which cause a change in the assets or liabilities of the country.

The Capital Account records all international transactions that involve a resident country's assets or liabilities. These transactions create future claims or obligations. Examples include foreign direct investment (FDI), foreign institutional investment (FII), external commercial borrowings (ECBs), loans from international financial institutions, and changes in foreign exchange reserves. When a country borrows from abroad, its liabilities increase; when it invests abroad, its assets increase. These are capital transactions. Therefore, Reason (R) is also true. …
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CBSE 2026Set 58/2/11 markMCQ
$Q. Read the following statements - Assertion (A) and Reason (R). Choose the correct option from those given below : Assertion (A) : Increase in exchange rate implies that the price of foreign currency in terms of domestic currency has increased. Reason (R) : Balance of trade records the inflows and outflows of foreign exchange. Options : (A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A). (B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A). (C) Assertion (A) is true, but Reason (R) is false. (D) Assertion (A) is false, but Reason (R) is true.$
›Reveal solutionSolution
An increase in the exchange rate means foreign currency has become more expensive in terms of domestic currency. The Balance of Trade, however, only records visible goods, not all foreign exchange flows. Therefore, Assertion (A) is true, but Reason (R) is false.

Let's break down each statement to understand its meaning and truthfulness.

Understanding Assertion (A)

Assertion (A): Increase in exchange rate implies that the price of foreign currency in terms of domestic currency has increased.

The exchange rate is simply the price of one currency in terms of another. For instance, if the exchange rate is ₹80 per US dollar, it means that one US dollar costs 80 Indian rupees.

An "increase in the exchange rate" in this context typically refers to an increase in the number of units of domestic currency required to buy one unit of foreign currency.

Consider our example:

Initial exchange rate: ₹80 per US dollar

Increased exchange rate: ₹82 per US dollar

In this scenario, to buy one US dollar, you now need to pay ₹82 instead of ₹80. This means the foreign currency (US dollar) has become more expensive in terms of the domestic currency (Indian rupee). Conversely, the domestic currency has depreciated.

Therefore, Assertion (A) is True.

Understanding Reason (R)

Reason (R): Balance of trade records the inflows and outflows of foreign exchange.

The Balance of Trade (BOT) is a component of the Current Account of the Balance of Payments. It specifically records the difference between a country's exports and imports of visible goods (merchandise).

Exports of goods: Lead to an inflow of foreign exchange.

Imports of goods: Lead to an outflow of foreign exchange.

While the Balance of Trade does involve inflows and outflows of foreign exchange related to goods, it does not record all inflows and outflows of foreign exchange. The broader concept that records all economic transactions between residents of a country and the rest of the world, including visible trade, invisible trade (services), income, transfers, and capital transactions, is the Balance of Payments (BOP). …
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CBSE 2026Set 58/3/11 markMCQ
$Q. Read the following statements carefully : Statement I : Trade in services includes both factor income and non-factor income transactions. Statement II : Current Account includes transactions related to goods, services and unilateral transfers. In the light of the given statements, choose the correct option from the following : (A) Statement I is true and Statement II is false. (B) Statement I is false and Statement II is true. (C) Both Statements I and II are true. (D) Both Statements I and II are false.$
›Reveal solutionSolution

Statement I is false because trade in services covers only non-factor income, while Statement II is true as the current account includes goods, services, and unilateral transfers.

To understand why, we need to step back and look at how a country’s balance of payments is structured. The balance of payments is a systematic record of all economic transactions between residents of a country and the rest of the world during a given period. It has two main accounts: the current account and the capital account.

The current account records transactions that arise from the exchange of goods, services, and unilateral transfers. Goods are tangible items like machinery or rice. Services are intangible — think of tourism, shipping, or consulting. Unilateral transfers are one-way payments, such as remittances from workers abroad or foreign aid. So Statement II is spot on: the current account does indeed include goods, services, and unilateral transfers. That part is correct.

Now, Statement I talks about “trade in services.” In the NCERT framework, trade in services is a subset of the current account. But here’s the crucial distinction: services in the current account are only those that are non-factor in nature. What does that mean? Factor income refers to earnings from factors of production — primarily labour and capital. For example, interest earned on foreign bonds or dividends from shares abroad is factor income. These are recorded under a separate head called “income” in the current account, not under “services.” Services in the trade account are strictly non-factor services — like travel, insurance, or software development.

Important

Trade in services in the current account excludes factor income. Factor income (like interest, dividends, and profits) is recorded separately under “income” in the current account, not under “services.” …

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CBSE 2026Set 58/3/11 markMCQ
$Q. Under the fixed exchange rate system, if the government decreases the value of domestic currency with respect to a foreign currency, it is known as __________ of currency. (Choose the correct option to fill in the blank) Options : (A) Devaluation (B) Depreciation (C) Appreciation (D) Revaluation$
›Reveal solutionSolution
Under a fixed exchange rate system, a deliberate reduction in the value of a domestic currency by the government is termed devaluation.

To understand the correct term, we first need to distinguish between the two primary types of exchange rate systems: fixed and flexible (or floating). The mechanism by which a currency's value changes depends critically on which system is in place.

Under a fixed exchange rate system, the government or the central bank officially sets and maintains the exchange rate at a specific level against a foreign currency or a basket of currencies. To maintain this fixed rate, the central bank must intervene in the foreign exchange market by buying or selling foreign currency. If market forces push the domestic currency's value down, the central bank sells foreign currency to buy domestic currency, increasing demand for the domestic currency and supporting its value. Conversely, if market forces push the domestic currency's value up, the central bank buys foreign currency by selling domestic currency, increasing the supply of domestic currency and preventing its appreciation.

When the government or central bank deliberately decides to decrease the official value of its domestic currency relative to a foreign currency under this fixed system, this action is known as devaluation. This is a policy decision, often undertaken to make exports cheaper and imports more expensive, thereby improving the trade balance.

Note

Devaluation is a policy tool used by governments to adjust their currency's value in a fixed exchange rate regime.

In contrast, under a flexible exchange rate system, the value of a currency is determined purely by the forces of demand and supply in the foreign exchange market, without direct intervention from the government or central bank.

If the value of the domestic currency falls due to market forces (e.g., increased supply of domestic currency or decreased demand for it), it is called depreciation.

If the value of the domestic currency rises due to market forces (e.g., decreased supply of domestic currency or increased demand for it), it is called appreciation.

Similarly, if the government or central bank deliberately decides to increase the official value of its domestic currency relative to a foreign currency under a fixed exchange rate system, this action is known as revaluation. …
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CBSE 2026Set MARCH1 markMCQ
$Q. Which one of the following is not a component of current account of balance of payments?$
(a) Investment
(b) Trade in goods
(c) Trade in services
(d) Transfer payments
›Reveal solutionSolution

Investment is a capital-account item, not part of the current account, so the answer is (a).

…

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CBSE 2026Set MARCH1 mark
$Q. What is appreciation of domestic currency?$
›Reveal solutionSolution

Appreciation of the domestic currency means a rise in its value against foreign currency, so fewer domestic units buy one unit of foreign currency.

Under a floating exchange rate system, the value of the domestic currency is determined by demand and supply in the foreign exchange market. Appreciation occurs when the domestic currency gains value, so that one unit of foreign currency (say a dollar) can now be bought with fewer units of domestic currency. For example, if the rate moves from Rs. 80 = 1 dollar to Rs. 75 = 1 dollar, the rupee has appreciated. Appreci …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Which of the following included in the invisible item? A) Non-factor services B) Income C) Transfers D) All of the above$
›Reveal solutionSolution

Invisibles include non-factor services, income and transfers alike, so the answer is D.

In the current account of the balance of payments, 'invisibles' are transactions that do not involve trade in physical goods. They comprise: (i) non-factor services such as shipping, banking and software; (ii) factor income such as interest, profit and dividends; and (iii) current transfers such as remittances and gifts. Since all thre …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Which of the following is an example of trade barriers? A) Subsidies B) Circular flow C) Tariffs D) Forex rate$
›Reveal solutionSolution

Tariffs are a trade barrier, so the answer is C.

Trade barriers are government-imposed restrictions on the free flow of goods between countries. A tariff is a tax levied on imported goods, which raises their price and discourages imports — a textbook trade barrier (along with quotas). Subsidies are financial assistance, the circular flow is a model of inco …

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CBSE 2026Set ANNUAL1 mark
$Q. Fill in the blank: ________ account records all international transactions of assets.$
›Reveal solutionSolution

The blank is filled by 'Capital' (capital account).

The balance of payments has two main accounts. The current account records trade in goods, services, income and transfers, while the capital account records all international transactions in assets — such as loans, investments (FDI/FII), banking capital and changes in foreign-exchange reserve …

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CBSE 2026Set ANNUAL1 mark
$Q. When does a surplus situations occur in the balance of trade?$
›Reveal solutionSolution

A balance-of-trade surplus occurs when exports of goods exceed imports of goods.

The balance of trade (BOT) is the difference between the value of a country's exports of goods (merchandise) and its imports of goods. A surplus (favourable balance of trade) arises when the value of exports is greater than the value of imports, so BOT is positive. If imports exceed exports, the balance of trade is in deficit. (Note: the balance of trade …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. When exchange rate in terms of domestic currency rises$
(a) Exports become cheaper
(b) Imports become cheaper
(c) Exports become costlier
(d) No effect on imports
›Reveal solutionSolution

When the exchange rate in terms of domestic currency rises (the domestic currency depreciates), exports become cheaper for foreigners, so the answer is (a).

The exchange rate 'in terms of domestic currency' means the amount of domestic currency needed to buy one unit of foreign currency (for example, rupees per dollar). When this rate rises, it takes more domestic currency to buy foreign currency, i.e. the domestic currency has depreciated (and the foreign currency has become dearer). As a result, foreigners now need less of their own currency …

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Q.In recent times the Indian Rupee (₹) depreciated to an all time low against the US dollar ($). Discuss its impact on India's Imports.

Part (a)

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