DEVALUATION OF INDIAN CURRENCY

Devaluation

of Indian

Currency

CONTENTS• MEANING• HISTORY• REASONS• TYPES• EFFECTS• CONDITIONS FOR SUCCESS

What is Devaluation?

INTRODUCTION• Devaluation means decreasing the value of nation's

currency relative to gold or the currencies of other nations. Under it , there is no change in the internal purchasing power of the currency.

• For example, Rs 25=1$ (before devaluation)

Rs 30=1$ (after devaluation)• In modern monetary policy, it is a reduction in the

value of currency with respect to those goods, services or other monetary units with which that currency can be exchanged.

DEPRECIATION AND DEVALUATION

• Depreciation is used to describe a decrease in a currency’s value due to market forces , not government or central bank policy actions.

• Depreciation and devaluation are sometimes incorrectly used interchangeably , but they always refer to values in terms of other currencies.

HISTORY OF DEVALUATION

THE 1966 DEVALUATION Current account deficit of over 290 crore due to

second five year plan Inflation has caused Indian prices to become much

higher than world prices Budget deficit due to defense spending in 1965/1966

was 24.06% of total expenditure. Money supply increase Depleting foreign reserves The first was India's war with Pakistan in late 1965. The US and other countries friendly towards pak

withdrew foreign aid to India

THE 1991 DEVALUATION The trade deficit in 1990 US $9.44 billion.

The current account deficit was US $9.7 billion.

The gulf war to higher imports due to the rise in oil

prices.

Cost pull inflation.

Political and economical instability.

Depleting foreign exchange reserves.

Gold is pledged to IMF by preceding government.

VALUATION HISTORY

reasons

REASONS FOR DEVALUATION

• To boost exports• To discourage imports• To correct the balance of payments• To make adjustments in the currency

value

REASONS FOR DEVALUATION

• To reduce debt burdens• To increase competiveness in the foreign

market• To achieve higher economic growth• To increase the standard of living

EFFECTS OF DEVALUATION

• Effects of Devaluation on Exports• Effects of Devaluation on Imports• The J-Curve Effect

EFFECTS OF DEVALUATION ON EXPORTS

• Inelastic Demand for Exports

It has an adverse effect on BOP of country devaluating its currency because its export earning have decreased.

EFFECTS OF DEVALUATION ON EXPORTS

• ELASTIC DEMAND FOR EXPORTS

It has favourable effect on BOP of country devaluating its currency by improving the BOP.

EFFECTS OF DEVALUATION ON

EXPORTS • UNITY

ELASTICITY OF DEMAND FOR EXPORTS

There is no effect on the BOP with devaluation.

EFFECTS OF DEVALUATION ON

IMPORTS • INELASTIC

DEMAND FOR IMPORTS

The BOP of the devaluing country worsen with perfectly inelastic demand for imports.

EFFECTS OF DEVALUATION ON IMPORTS

• ELASTIC DEMAND FOR IMPORTS

It has favourable effect on BOP of country devaluating its currency.

EFFECTS OF DEVALUATION ON IMPORTS

• UNITY ELASTICITY OF DEMAND FOR IMPORTS

There is no effect of devaluation on BOP.

THE J-CURVE EFFECT

• When devaluation causes the balance of payments to worsen in the beginning and then to improve it,there is a J-Curve Effect.

TYPES1) Planned Devaluation2)Market-driven Devaluation

1) PLANNED DEVALUATION

Planned devaluations are brought about almost exclusively by government decisions to deliberately reduce the relative value of a currency, usually intended as a means to some improvement in the country's trading position.

2) Market-driven devaluation

The value of a currency, relative to the world’s major currencies, especially the dollar, declines on its own through trading in the foreign exchange markets.

CONDITIONS FOR THE SUCCESS OF

DEVALUATION• Domestic Price Stability• International Cooperation• Elasticity of imports and exports• Spirit of sacrifice by the people

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