Qn: With the aid of a diagram and using Extract 1, account for the depreciation of rupee. (5m)

Extract 1: The drag on Indian rupee

Advanced economies like the euro zone and Japan are still struggling to come out of deflationary pressures.There has been a continuous fall in India's exports since December 2014. On the other hand, the outlook for the domestic economy looks robust and is likely to remain promising.

Some foreign investors had booked profits on their holdings in Indian equities and bonds, and are likely to repatriate funds back to US bonds as and when the US Fed hikes rates. True to expectations, US did increase its interest rate from 0.25% to 1.5% between 2015 and 2017. This has contributed to foreign money outflows of India.