Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Q4. Analyse how India’s goods trade deficit interacts with capital flow volatility to influence rupee stability. Suggest appropriate structural correctives to address this vulnerability. (10 M)
Difficulty Level: Medium
Reference: IE
Why the question
Recent Economic Survey findings on rupee depreciation and volatile foreign capital flows have highlighted structural weaknesses in India’s external sector, making this issue relevant for macroeconomic stability and policy reform debates.Key Demand of the question
The question requires examining how India’s merchandise trade deficit and capital flow volatility interact to influence rupee stability, and suggesting structural-level measures to address this external sector vulnerability.Structure of the Answer
Introduction
Contextualise the rupee’s recent volatility by linking it to India’s external sector structure rather than short-term macroeconomic fluctuations.Body
- Explain the interaction between a persistent goods trade deficit and volatile capital flows in generating pressure on the rupee and amplifying exchange rate instability.
- Suggest broad structural correctives aimed at improving export composition, reducing dependence on volatile capital inflows, and strengthening external resilience.
Conclusion
Underline the importance of long-term external sector rebalancing over ad hoc interventions to ensure durable rupee stability.
