What will happen if Indian Rupee is undervalued?
Group of answer choices
Foreign Direct Investment from India increases
Export from India increases
Indian government will have better control over domestic inflation
Import in India increases
The Correct Answer and Explanation is:
Correct answer:
Export from India increases
Explanation:
When the Indian Rupee (INR) is undervalued, it means the currency’s value is lower compared to other foreign currencies than what economic fundamentals would suggest. In simpler terms, one unit of foreign currency can buy more Indian Rupees than usual.
Here’s what happens in this scenario:
- Exports Become Cheaper and More Competitive:
Because the rupee is undervalued, Indian goods and services priced in rupees cost less when converted into foreign currencies. For example, if the exchange rate shifts from 70 INR/USD to 80 INR/USD (rupee depreciation or undervaluation), a product costing 700 INR would cost $10 before but only $8.75 now. This makes Indian exports more attractive to foreign buyers because they get more value for their money. - Exports Increase:
Due to this competitive pricing advantage, foreign demand for Indian goods and services typically rises. Increased exports can boost Indian industries, increase production, create jobs, and improve the country’s trade balance. - Imports Become More Expensive:
When the rupee is undervalued, importing goods from other countries costs more in rupees. For example, a $100 imported product that cost 7,000 INR before would now cost 8,000 INR, making imports less attractive and possibly reducing import volumes. - Foreign Direct Investment (FDI) Effect:
FDI from India abroad may not necessarily increase because an undervalued rupee means Indian investors need more rupees to invest the same amount abroad (since foreign currency is now more expensive). So this option is incorrect. - Inflation Control:
The government’s control over domestic inflation generally becomes more challenging when the rupee is undervalued because imports (especially essential goods like fuel and machinery) become more expensive. This can cause inflationary pressure rather than better control.
Summary:
An undervalued Indian Rupee boosts exports by making Indian goods cheaper and more competitive in the global market. This typically leads to an increase in export volumes, which helps improve the country’s trade balance and economic growth. Meanwhile, imports become more costly, which might reduce import volumes but can also add inflationary pressure. Hence, the correct answer is that exports from India increase when the rupee is undervalued.