UPSC Indian Economy – Chapter 19: Exchange Rate, Convertibility and the Rupee (25 MCQs)
UPSC Indian Economy – Chapter 19: Exchange Rate, Convertibility and the Rupee (25 MCQs) – 25 questions, subject: Indian Economy. Every question has the correct answer with a one-line explanation; tap "Show Answer". Free practice for TNPSC, UPSC, SSC, Bank and RRB exams – Shanmugam IAS Academy, Coimbatore.
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If the exchange rate moves from ₹90 to ₹93 per US dollar, the rupee has:
Correct Answer: D [depreciated]
Explanation:
more rupees per dollar.
India's exchange-rate system since March 1993 is best described as:
Correct Answer: D [a managed float]
Explanation:
Since March 1993 the market sets the rupee's rate, while the RBI intervenes only to curb excessive volatility – a managed float.
In November 2025 the IMF classified India's de facto exchange-rate arrangement as:
Correct Answer: B [crawl-like arrangement]
Explanation:
The IMF's 2025 staff report moved India from 'stabilised' to 'crawl-like', as the rupee stayed within a 2 per cent band around a trend.
A rise in the RBI's Real Effective Exchange Rate (REER) index indicates:
Correct Answer: B [a loss of trade competitiveness]
Explanation:
A higher REER means Indian goods have become dearer relative to partners' goods, so exports lose price competitiveness.
The base year of the RBI's 40-currency NEER and REER indices is:
Correct Answer: A [2015-16]
Explanation:
The RBI's 40-currency NEER and REER series use 2015-16 = 100, with a CPI-based REER.
Consider the following statements about Purchasing Power Parity (PPP):
1. PPP compares the prices of the same basket of goods and services across countries.
2. India's GDP is larger in PPP terms than at market exchange rates.
3. In PPP terms India is the sixth largest economy.
Which of the statements given above are correct?
Correct Answer: B [1 and 2 only]
Explanation:
PPP compares prices of the same basket, and India's lower prices make its PPP GDP larger; India ranks third, not sixth.
Using the formula REER ≈ NEER × (domestic price index ÷ partners' price index), if NEER = 90, India's price index = 120 and partners' price index = 110, the REER is about:
Correct Answer: C [98.2]
Explanation:
90 × 120 ÷ 110.
If the rate moves from ₹85 to ₹94 per dollar, the rupee's loss of dollar value is about:
Correct Answer: D [9.6 per cent]
Explanation:
1 − 85 ÷ 94.
The delayed improvement in the trade balance after a depreciation is described by the:
Correct Answer: B [J-curve]
Explanation:
After a depreciation the trade balance first worsens and improves only as volumes adjust, tracing a J-shaped path.
A sharp depreciation of the rupee is most likely to:
Correct Answer: A [raise the rupee cost of servicing ECBs]
Explanation:
A weaker rupee means more rupees are needed to buy each dollar of ECB interest and principal.
Assertion (A): Devaluation does not necessarily improve a country's trade balance.
Reason (R): Demand for essential imports such as crude oil may not fall much when their rupee price rises.
Correct Answer: A [Both A and R are true, and R is the correct explanation of A]
Explanation:
Both are true, and inelastic demand for essential imports such as oil is exactly why devaluation may not cut the import bill.
India accepted the obligations of Article VIII of the IMF's Articles of Agreement (current account convertibility) in:
Correct Answer: C [1994]
Explanation:
August 1994.
The Foreign Exchange Management Act, 1999 came into force on:
Correct Answer: D [1 June 2000]
Explanation:
FEMA, 1999 replaced FERA, 1973 and was brought into force on 1 June 2000.
Which of the following statements about India's convertibility are correct?
1. The rupee is fully convertible on the current account.
2. The rupee is fully convertible on the capital account.
3. The Tarapore Committee (1997) laid down preconditions for capital account convertibility.
Select the correct answer:
Correct Answer: C [1 and 3 only]
Explanation:
The rupee is fully convertible on current account since August 1994, and the 1997 Tarapore Committee set capital account preconditions.
Arrange the following in chronological order:
1. LERMS (dual exchange rate)
2. FEMA comes into force
3. Rupee symbol ₹ adopted
4. Current account convertibility
Select the correct answer:
Correct Answer: D [1-4-2-3]
Explanation:
1992, 1994, 2000, 2010.
Under the impossible trinity, a country cannot simultaneously have a fixed exchange rate, free capital movement and:
Correct Answer: A [an independent monetary policy]
Explanation:
The impossible trinity says a fixed exchange rate, free capital movement and independent monetary policy cannot all coexist.
Special Rupee Vostro Accounts are associated with:
Correct Answer: A [settlement of international trade in rupees]
Explanation:
July 2022.
The RBI Inter-Departmental Group on Internationalisation of INR (2023) was chaired by:
Correct Answer: C [Radha Shyam Ratho]
Explanation:
The IDG report on Internationalisation of INR, released by the RBI on 5 July 2023, was prepared under Radha Shyam Ratho.
In October 2026, amid pressure on the rupee, the RBI's Monetary Policy Committee:
Correct Answer: A [raised the repo rate to 5.50 per cent]
Explanation:
7 October 2026.
The designer of the rupee symbol ₹, adopted in 2010, is:
Correct Answer: D [D. Udaya Kumar]
Explanation:
D. Udaya Kumar's design was approved as the rupee symbol on 15 July 2010.
With reference to the Indian economy, consider the following statements:
1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Which of the above statements are correct?
Correct Answer: C [1 and 3 only]
Explanation:
A rising RBI NEER means rupee appreciation, and higher domestic inflation widens the NEER–REER gap; statement 2 is false.
Consider the following statements: The effect of devaluation of a currency is that it necessarily
1. improves the competitiveness of the domestic exports in the foreign markets
2. increases the foreign value of domestic currency
3. improves the trade balance
Which of the above statements is/are correct?
Correct Answer: A [1 only]
Explanation:
Devaluation always cheapens exports in foreign currency, but it lowers the currency's value and need not improve the trade balance.
Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of the Indian rupee?
Correct Answer: D [Following an expansionary monetary policy.]
Explanation:
it would weaken the rupee.
Consider the following statements:
1. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries.
2. In terms of PPP dollars, India is the sixth largest economy in the world.
Which of the statements given above is/are correct?
Correct Answer: A [1 only]
Explanation:
PPP rates compare prices of the same basket of goods and services; in PPP terms India is third, not sixth.
Convertibility of rupee implies:
Correct Answer: C [freely permitting the conversion of rupee to other currencies and vice versa]
Explanation:
Convertibility means the rupee can be freely exchanged for foreign currencies and back at the market rate.
➤ Full notes, maps, tables, a reason for every option and Mains PYQs – U15 · Indian Economy (UPSC book, ₹249): www.shanmugamiasacademy.in/study-materials/upsc-indian-economy
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