Devaluation of Rupee

Topics: Currency, Macroeconomics, International economics Pages: 4 (1078 words) Published: August 5, 2013
The INDIAN Perspective

By: Vignesh Srinivasan
NMIMS Hyderabad
Mob: 09618616500

“I never thought I can buy so much with $100” is the reaction of the tourists coming to India these days. Between early May and July this year, the rupee slid about 15% against the dollar, from about 53 to 61. The Indian government rushed to calm the nation’s nerves with reform pledges and rightback assurances against the dollar. But the Indian currency was under far worse pressure in 1966 and 1991 when the government devalued the rupee and the economy went through contrasting experiences.

‘Devaluation’ means that a country’s currency has reduced in value in comparison to other currencies i.e. official lowering of nation’s currency. It is a practise which has been followed by different countries at different times depending on their economic situations. The primary reason for devaluation is that the government had maintained a fixed rate over a period of time which became unsustainable. (This fixed system is called ‘currency pegging’). Devaluation is also adopted by countries to relieve an unfavourable balance of trade, and per capita income, to put restrictions on commodities as well as capital flows etc. Devaluation can be done in two ways; Planned Devaluation and Market Driven Devaluation.

Planned Devaluations are ones which are brought about by government decisions to deliberately reduce the relative value of currency, usually intended as a means to some improvement on countries trading positions. E.g.: China against USA, India in 1966.

The Other one is Market Driven Devaluation which is a formal recognition by a government, frequently during a monetary crisis that the value of its currency relative to major world currencies (especially Dollar) has already depreciated through trading in foreign exchange markets. E.g.: Indian Rupee since 1991.

In both cases, the country whose currency is devalued should benefit...
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