In the context of India, which of the following factors is/are contributor/ contributors to reducing the risk of a currency crisis?

1. The foreign currency earnings of India’s IT sector
2. Increasing the government expenditure
3. Remittances from Indians abroad

Select the correct answer using the code given below.

A currency crisis leads to a sharp depreciation of the domestic currency, potentially forcing authorities to sell foreign exchange reserves and take measures like raising domestic interest rates to defend the currency.

Statement 1: Strong export performance, such as that of India's IT sector, makes a currency crisis less likely. Increased foreign currency earnings boost the demand for the domestic currency (Rupee), strengthening it.

Statement 2: Increased government expenditure can increase imports, potentially worsening a currency crisis. Austerity measures in public spending are often prescribed to manage foreign exchange crises.

Statement 3: Greater remittances from Indians abroad increase the inflow of foreign currency, which is converted into Rupees, thereby increasing demand for the domestic currency and helping to avert a currency crisis.

Therefore, statement 1 and statement 3 are contributors to reducing the risk of a currency crisis. Statement 2 is not a contributor to reducing the risk of a currency crisis. Hence, option B is the correct answer.

Sources:

• RBI - Exchange Rate Management
• Investopedia - Currency Crisis