Question

How can RBI helps in bringing down the foreign exchange rate which is very high?

Answer 1

Answer:

When the foreign exchange rate becomes very high, the RBI can sell currency from its reserve in the market. This will lead to an increase in the supply of foreign currency in the market. ... When the exchange rate is high, RBI can increase the interest rate. This will increase the flow of capital from abroad.

Explanation:

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Answer 2

To reduce the foreign exchange rate which is very high,RBI can basically increase the supply of foreign currency in the market.There are two ways RBI can do it.First,selling foreign currency in the market and secondly,raising the domestic interest rate.

Explanation:

When the foreign exchange rate is very high,the RBI can sell or release foreign currency in the market from the reserve thereby increasing the supply of foreign currency leading to reduction in the value of the currency.Therefore,increase in supply of the foreign currency would lead to a drop in foreign exchange rate.

The RBI can also increase the domestic rate of interest in the money market.This will essentially reduce the domestic flow of liquidity and capital and people would demand foreign capital leading to an increase in the foreign capital flow from foreign countries.This will also increase the supply of foreign currency in the market and consequently,the foreign exchange rate would decline.