UPSC CSE Prelims 1998

Correct Option (b):

The price of any currency in the international market is primarily determined by market forces influenced by various factors. Statements 2 and 3 accurately reflect these determinants.

• Demand for goods/services provided by the country concerned: A higher demand for a country's exports (goods and services) in the international market necessitates foreign buyers to acquire that country's currency to complete transactions. This increased demand for the currency leads to its appreciation.
• Stability of the government of the concerned country: Political and governmental stability enhances investor confidence, attracting foreign direct investment (FDI) and foreign institutional investment (FII). Increased capital inflows create a demand for the domestic currency, thereby influencing its value positively.

Incorrect Options:

• World Bank: The World Bank is a multilateral financial institution focused on development assistance. It does not directly determine the exchange rates of currencies. Exchange rates are primarily determined by market forces (demand and supply) in floating exchange rate regimes or by central bank intervention in pegged systems.
• Economic potential of the country in question: While a country's economic potential can influence long-term investor sentiment and attract future investment, it does not directly determine the immediate price of its currency. Currency valuation is more directly influenced by actual capital flows, trade balances, interest rate differentials, and other real economic transactions, rather than merely potential.