Import Demand Drives Currency Depreciation

Steps:

• Increased imports by Indians raise demand for US dollars to pay foreign suppliers.
• This boosts supply of Indian rupees in the forex market as they're exchanged for dollars.
• Higher USD demand relative to INR supply shifts the exchange rate curve.
• Result: Rupee depreciates against the dollar.

Why B is correct:

• Per supply-demand in forex markets, greater import demand increases foreign currency needs, depreciating the domestic currency.

Why the others are wrong:

• A: Lower inflation strengthens the rupee via purchasing power parity, causing appreciation.
• C: More FDI inflows increase INR demand, appreciating the rupee.
• D: Central bank buying INR raises its demand, leading to appreciation.

Final answer: B