Which among the following currencies is the costliest?

Question

UnlockIAS · Accepted Answer

Correct — B, Pound Sterling. 'Costliest' here means the currency whose single unit costs the most, and the cleanest way to settle it for an Indian paper is to price all three against the rupee on the same day using the Reserve Bank of India's own reference rate. On 29 September 2023, the last publication day of the month in which this paper was held, the RBI reference rates were: 1 US Dollar = ₹83.0580, 1 Euro = ₹87.9379 and 1 Pound Sterling = ₹101.6713. One pound therefore cost about ₹13.73 more than one euro and about ₹18.61 more than one dollar. The same ordering falls out of the European Central Bank's euro reference rates for that day, computed from a different desk in a different currency: 1 EUR = 1.0594 USD and 1 EUR = 0.86458 GBP, which works out to 1 GBP = 1.2253 USD = 1.1566 EUR — within a fraction of a paisa of the cross-rates implied by the RBI table. Two central banks, one answer: among the three currencies named, sterling has the highest unit value. That result is also not an accident of the week the exam fell in. Over the whole ECB daily series — 7,061 business days from 4 January 1999 to the present — sterling has never once closed below the euro (its weakest reading is 0.97855 GBP to the euro on 29 December 2008, i.e. £1 = €1.02) and never once closed below the dollar (its lowest is $1.0596 on 28 September 2022, during the gilt sell-off that followed the UK's mini-budget). The euro-versus-dollar ranking is nothing like as settled — the euro closed below the dollar on 753 of those days — but that only affects which of the two is second, not which of the three is first.

Why the other options are wrong — (a) Second of the three on the day, not first. The RBI reference rate on 29 September 2023 put the euro at ₹87.9379 against sterling's ₹101.6713, and the ECB's own quote of 0.86458 pounds to the euro says the same thing from the other side — it takes only about 86 pence to buy a euro, so the euro is the cheaper unit. The option is genuinely tempting for a candidate who remembers that the euro was above the dollar in 2023 and stops there, because that half of the ranking is correct; the euro simply is not the top of a list that includes sterling.  (c) The reflex answer, and the trap the question is built on. The dollar is the world's dominant reserve, invoicing and settlement currency, and it is the currency the rupee is habitually quoted against, so it feels like the 'strongest'. But dominance is about how widely a currency is used, not how much one unit of it costs, and on the RBI table for 29 September 2023 the dollar was the cheapest of the three at ₹83.0580 — below both the euro and sterling. A currency's unit price is largely an artifact of how it was denominated when it was created.  (d) The stem asks which currency 'among the following' is the costliest, so it is a comparison confined to the three named units, and one of them plainly wins it on every published rate. 'None of the above' can only stand if all three are eliminated, and sterling is not eliminated by anything — it heads the list on the RBI reference rate, on the ECB reference rate and on the cross-rates derived from either.

Concept: An exchange rate is simply a price: the number of units of one currency needed to buy one unit of another. Two quite different things get called the 'value' of a currency and confusing them is what this question punishes. The first is the price of one unit — what ₹101.67 for a pound or ₹83.06 for a dollar measures. That figure depends heavily on an accident of history, namely the size of the unit a country chose when it created or last redenominated its money, which is why the Japanese yen sits at ₹0.5581 to the yen on the very same RBI table while Japan remains one of the world's largest economies. The second is a currency's strength or importance — its purchasing power at home, its stability, and how far the rest of the world is willing to hold and settle in it. The US dollar leads decisively on that second measure and still trails both sterling and the euro on the first. India runs a market-determined exchange rate: the rupee's external value is set by demand for and supply of foreign currency from importers, exporters, investors, remitters and travellers, with the Reserve Bank intervening as a participant rather than announcing a parity. The RBI's reference rate, published on every business day for the US dollar, the euro, the pound and the yen, is the benchmark quote for that market.

State PCS 2023 Q59 — Economy PYQ with Answer

State PCS 2023 Q59 — Economy PYQ with Answer