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.

QUESTION

Medium

Economy

Prelims 2019

In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis?

The foreign currency earnings of India’s IT sector
Increasing the government expenditure
Remittances from Indians abroad

Select the correct answer using the code given below.

Select an option to attempt

Explanation

Statement 1 is correct: Foreign currency earnings - The IT sector generates foreign exchange through exports of services. This increases the supply of foreign currency reserves, making it easier to defend the rupee's value in the foreign exchange market during times of stress.

Statement 2 is incorrect: While government spending can stimulate economic growth, it can also lead to a higher budget deficit. If the deficit is financed by excessive borrowing, it can put pressure on the currency if investors lose confidence in the government's ability to repay its debts.

Statement 3 is correct: Remittances from abroad - When Indians working abroad send money back home, it adds to the inflow of foreign currency. This strengthens the country's foreign exchange reserves and provides a buffer against external shocks.

Therefore, the correct code is 1 and 3 only.

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