Q. Which of the following is a step taken by RBI in response to falling Rupee?
1. State-run banks are usually instructed by the RBI to buy Dollars.
2. RBI is raises benchmark interest rates.
Select the correct answer using the codes given below:

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: B

How does the RBI respond to the fall in the Exchange Rate?

  • As a matter of policy, the RBI has usually tried to slow down or smoothen (rather than reverse or prevent) the fall in exchange rate;
  • The aim of the RBI’s policy is to allow the Rupee to find its natural value in the market but without undue volatility;
  • State-run banks are usually instructed by the RBI to sell Dollars in order to offer some support to the Rupee. By selling Dollars in the open market in exchange for Rupees, the RBI can improve demand for the Rupee and cushion its fall;
  • The RBI is also seen raising benchmark interest rates to defend the Rupee by preventing any rapid outflow of capital from India.

Source: EPIC July 2022