Question : The liberalization of the external sector in 1991 led to the devaluation of the:
Option 1: US Dollar
Option 2: Indian Rupee
Option 3: Euro
Option 4: Japanese Yen
Correct Answer: Indian Rupee
Solution : The correct answer is (b) Indian Rupee
However, with the liberalization of the external sector, the Indian government adopted a more market-oriented exchange rate regime. This meant that the value of the Indian rupee became more flexible and was determined by market forces of supply and demand.
Initially, the shift to a market-determined exchange rate regime resulted in the devaluation of the Indian rupee. Devaluation means that the value of a currency decreases relative to other currencies. In the case of India in 1991, the devaluation of the Indian rupee occurred as a result of market forces adjusting the exchange rate to reflect the country's economic conditions and external competitiveness.
