During The Year 2013 The Indian Rupee Depreciated Sharply Against The Dollar To

During the year 2013, the Indian rupee depreciated sharply against the dollar. To check any further depreciation in the rupee, the central bank of India (Reserve Bank of India or RBI) increased the interest rate in the economy in the short run. How will the increased rate help in controlling the rupee depreciation in the Indian economy? Suppose the RBI increases the money supply instead of the in- terest rate. Will that check the depreciation of the rupee? Explain using the money supply, interest rate and the exchange rate mechanism.

Prof. Angela

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