Correct Option
An expansionary monetary policy, which typically involves lowering interest rates or increasing the money supply, aims to stimulate economic activity. However, such a policy increases rupee liquidity in the economy. This can lead to inflationary pressures and make holding rupees less attractive, potentially increasing the demand for foreign currency and exacerbating the depreciation of the rupee. Measures to stop a rupee slide generally focus on either reducing the demand for foreign currency or increasing its supply, which is contrary to the effects of an expansionary monetary policy.
Incorrect Options
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Curbing imports of non-essential goods and promoting exports: This measure directly addresses the current account deficit. Reducing non-essential imports decreases the demand for foreign currency, while promoting exports increases the inflow of foreign currency. Both actions help to strengthen the rupee.
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Encouraging Indian borrowers to issue rupee-denominated Masala bonds: Masala bonds are issued by Indian entities in overseas markets but are denominated in Indian rupees. This encourages foreign investors to bring foreign currency into India to invest in these bonds, increasing foreign capital inflow and reducing the demand for foreign currency by Indian borrowers, thereby supporting the rupee.
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Easing conditions relating to external commercial borrowing: Easing conditions for External Commercial Borrowings (ECBs) makes it more attractive and easier for Indian companies to borrow funds from foreign sources. This leads to an increased inflow of foreign currency into the domestic economy, which helps to bolster the value of the rupee.