UPSC Prelims Practice Questions — Should the rupee be left to depreciate?

Q1. With reference to India's managed floating exchange rate system, consider the following statements. Which of the above is/are NOT correct?

  1. The rupee's external value is largely determined by the market demand for and supply of foreign exchange.
  2. The RBI intervenes to defend a pre-announced fixed target rate for the rupee against the US dollar.
  3. A unified market-determined exchange rate replaced the earlier dual-rate LERMS with effect from 1993.
  4. The present regime was adopted as part of the reforms following the 1991 balance-of-payments crisis.
  • A. 1 and 3
  • B. 2 only
  • C. 3 and 4
  • D. 1, 2 and 4

Q2. In the context of India's exchange rate policy, a 'managed floating exchange rate' is best described as a system in which:

  • A. the exchange rate is largely determined by market demand and supply, with the central bank intervening only to contain excessive volatility rather than to defend a fixed parity
  • B. the central bank fixes and periodically announces an official par value for the rupee against the US dollar
  • C. the rupee is pegged to a basket of currencies within a pre-announced band that is defended at all costs
  • D. the exchange rate is fully market-determined with a statutory bar on any central bank intervention

Q3. In the RBI's foreign exchange operations during 2025-26, the term 'net short forward book' refers to:

  • A. the net value of US dollars the RBI is contractually obliged to deliver (sell) under outstanding forward contracts, over and above its forward purchases
  • B. the total quantity of dollars the RBI has already sold in the spot market during the financial year
  • C. the shortfall of foreign exchange reserves below the level needed to cover a fixed number of months of imports
  • D. the net amount of rupees that banks are permitted to hold overnight in foreign currency

Q4. During 2025-26, the RBI used several instruments to support the rupee. Which of the following are correctly identified as measures actually used?

  1. Net sale of US dollars in the spot foreign exchange market.
  2. Capping banks' net open position in rupee (NOP-INR) in the onshore deliverable market at USD 100 million a day.
  3. Rationalising and easing the External Commercial Borrowing (ECB) framework to attract capital inflows.
  4. Imposing a statutory fixed peg of the rupee to the US dollar.
  • A. 1, 2 and 3
  • B. 1 and 4 only
  • C. 2, 3 and 4
  • D. 1 and 3 only

Q5. Direct intervention in India's foreign exchange market to moderate rupee volatility is operationally carried out by which one of the following?

  • A. The Financial Markets Operations Department of the Reserve Bank of India
  • B. The Department of Economic Affairs, Ministry of Finance
  • C. The Directorate General of Foreign Trade
  • D. The Securities and Exchange Board of India (SEBI)

Q6. The sharp depreciation of the rupee through early 2026 was attributed primarily to a surge in the global price of which one of the following — India's single largest import by value?

  • A. Crude oil / petroleum
  • B. Gold
  • C. Electronic goods
  • D. Fertilisers

Q7. India's quarterly Current Account Deficit figures, which reflect external pressure on the rupee, are officially compiled and published by which one of the following?

  • A. Reserve Bank of India
  • B. Ministry of Statistics and Programme Implementation (MoSPI)
  • C. Directorate General of Commercial Intelligence and Statistics (DGCIS)
  • D. Controller General of Accounts

Q8. With reference to India's current account and its link with the rupee, consider the following statements. Which of the above is/are NOT correct?

  1. The current account records trade in goods and services, primary income and secondary income (transfers).
  2. India recorded a current account surplus in the fourth quarter (January–March) of 2025-26.
  3. A widening current account deficit tends, other things being equal, to put downward pressure on the rupee.
  4. For the full year 2025-26, India ran a current account surplus of 0.6% of GDP.
  • A. 1 and 2
  • B. 3 only
  • C. 2 and 3
  • D. 4 only

Q9. Unlike a market-driven depreciation, a devaluation is a deliberate administrative lowering of a currency's official value under a fixed regime; in India such a decision on the rupee would be taken by:

  • A. the Reserve Bank of India together with the Union Government
  • B. the Securities and Exchange Board of India
  • C. the Finance Commission
  • D. NITI Aayog

Q10. With reference to the effects of a weaker rupee on the Indian economy, consider the following statements. Which of the statements given above is/are correct?

  1. A weaker rupee raises India's oil import bill, adding roughly $12–15 billion to the annual bill for every $10 rise in crude prices.
  2. In recent years a weaker rupee has uniformly boosted India's labour-intensive export sectors, such as textiles, more than its import-heavy sectors.
  3. Because India pays for most key imports such as oil and electronics in US dollars, depreciation directly raises domestic input costs and imported inflation.
  • A. 1 and 3 only
  • B. 2 and 3 only
  • C. 1 only
  • D. 1, 2 and 3

Q11. In the 2026 debate on rupee intervention, which former Governor of the Reserve Bank of India publicly argued that the RBI should dial back its intervention and let the exchange rate weaken to send correct price signals?

  • A. Duvvuri Subbarao
  • B. Raghuram Rajan
  • C. Urjit Patel
  • D. Shaktikanta Das

Q12. Which one of the following best describes the stated objective of the RBI's exchange rate policy within the Foreign Exchange Management Act (FEMA) framework?

  • A. To ensure orderly conditions in the foreign exchange market and contain excessive volatility, without committing to defend any fixed level of the rupee
  • B. To always maintain the rupee at a fixed parity against the US dollar at all costs
  • C. To permanently prevent any depreciation and maximise the external value of the rupee
  • D. To eliminate the current account deficit entirely through exchange controls