"Many Multinational Corporations (MNCs) have recently shifted their production from China to India, which has boosted the `Make in India' plan." Assuming other factors being constant, discuss the effects of the given statement on foreign exchange rates with reference to the Indian economy.

Question

Accepted Answer

When MNCs shift production from China to India under the 'Make in India' plan, it has the following effects on the foreign exchange market:

1. **Increase in Foreign Direct Investment (FDI):** MNCs bring foreign capital to India, increasing the supply of foreign exchange in the Indian market.

2. **Increase in Exports:** With increased production in India, exports are likely to rise, further increasing the supply of foreign exchange.

3. **Appreciation of Indian Rupee:** The increased supply of foreign exchange (dollars) relative to demand may cause the Indian rupee to appreciate against foreign currencies.

4. **Employment and Income Generation:** This leads to higher domestic income, which may increase imports, partially offsetting the supply increase.

Overall, the net effect is an increase in supply of foreign exchange, which tends to appreciate the domestic currency.