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Sir I understand that increasing imports leads towards deficit in balance of payments and Falling exchange rate and thus increasing import prices.
But how does increase in domestic inflation lead to increasing imports prices. Is it due to falling exchange rate as well?
Domestic inflation does not directly lead to increasing import prices.
The only way it can affect is by the exchange rate falling.
And sir for money supply a reason for its reduction can be given as lower demand for borrowing money from financial institutions due to higher interest rates?
It is really the other way round.
The state controls the money supply, and when there is less money then interest rates will rise, when there is more money then interest rates will fall.
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