UPSC | Prelims GS | 2026

India's exchange-rate regime was described as a managed float. If demand for dollars substantially exceeds supply, which action is consistent with it?

  1. The central bank may sell foreign exchange reserves to moderate rupee depreciation
  2. The central bank must permanently fix the rupee at a statutory parity
  3. The central bank must prohibit all imports
  4. The central bank can increase dollar supply only by raising tariffs

Answer

Correct Answer

The central bank may sell foreign exchange reserves to moderate rupee depreciation

Explanation

Under a managed float, markets influence the rate but the central bank limits excessive movement. Selling reserves increases dollar supply and can moderate rupee depreciation. B describes a fixed regime, while C and D are not normal foreign-exchange intervention tools. Trade restrictions cannot substitute for direct market operations.

Topics: exchange rate, foreign exchange market, indian economy, managed float and rbi intervention