Which of the following policies help to raise interest rate unambiguously and thereby lead to appreciation of currency?

To raise interest rates unambiguously, one must consider the combined effects of fiscal and monetary stances. Contractionary monetary policy (tight money policy) involves reducing the money supply or raising the policy rate, which directly increases market interest rates [5]. Conversely, expansionary fiscal policy, characterized by increased government spending or tax cuts, increases the demand for loanable funds to finance the deficit, which puts upward pressure on interest rates. While contractionary fiscal policy tends to reduce interest rates, the combination of contractionary monetary and expansionary fiscal policies ensures that both forces push interest rates upward. Higher domestic interest rates attract foreign capital as investors seek higher yields, increasing the demand for the domestic currency and leading to its appreciation [4]. Therefore, this policy mix provides the most certain path to higher rates and a stronger currency.

Sources

1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
2. [5] https://www.investopedia.com/terms/e/expansionary_policy.asp
3. [4] https://www.federalreserve.gov/aboutthefed/fedexplained/monetary-policy.htm