Which among the following factor can contribute to the appreciation of the rupee?

🔑 Key Points
💵 Appreciation of the Rupee:
→ In a floating exchange rate system, market forces (based on the demand and supply of a currency) determine the value of a currency.
→ It is an increase in the value of one currency in relation to another currency.
→ Currencies appreciate against each other for a variety of reasons, including government policy, interest rates, trade balances, and business cycles.
→ Currency appreciation discourages a country's export activity as its products and services become costlier to buy.

💰 Foreign Capital:
→ The inflow of foreign capital leads to an appreciation of the rupee, while the outflow would lead to a depreciation of the rupee. Hence, option 1 is not correct.
→ When Foreign Institutional Investors (FIIs) bring their capital into India, they need to convert these currencies into rupees to buy stocks.
→ This increases the demand for the rupee and pushes up its value against the foreign currency.

💸 Current Account:
→ The current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest, and dividends.
→ A deficit in the current account shows that the country is spending more on foreign trade than it is earning, borrowing capital from foreign sources to cover the deficit.
→ A higher current account deficit can lead to the depreciation of the rupee, while a lower current account deficit can lead to an appreciation of the rupee. Hence, option 2 is correct.

📉 Inflation:
→ As a general rule, a country with a consistently lower inflation rate sees a rising currency value, as its purchasing power increases relative to other currencies.
→ Countries with higher inflation typically see depreciation in their currency in relation to the currencies of their trading partners. Hence, option 3 is not correct.

📊 Monetary Policy:
→ Expansionary monetary policy is a set of policy measures used by the RBI to stimulate the economy.
→ This leads to an increase in the money supply in an economy, making it inflationary in nature.
→ Countries with higher inflation typically see depreciation in their currency. Hence, option 4 is not correct.