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Devaluation of currency

CA Priya (CS Final) (1049 Points)

08 October 2010

Hey buddies................. What is Devaluation of currency???????? When will a Govt end up in Devaluation????????? Hope its for encouraging Exports............. Kindly explain the concept..................... Thanks in advance...................

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YASH JAIN (ARTICLE) (554 Points)
Replied 08 October 2010

As the term Devaluation itself suggest devaluation means lowering or bringing down the nations currency value against a particular currency or basket of currency. The act of devaluation in our case is done by RBI but that tooo in very rare of rarest case. It involves direct intereferance in currency markets by the RBI. RBI will buy dollars heavily and will go on selling rupee till it (Rupee) attains a partiular level of value which RBI thinks is correct according to it.

Benefit of devaluation: It provides a power dose to exporters as their products become affordable to foregin buyers since Foregin buyers wil be able to buy much more than before the devalustion of currency.

It makes import costlier and hence it helps in favourable Balance of Paymetns(Export - Import= Net gain in foregin currency). This leaves our country with sufficient amount of Foregin Reserves so as to avoid pre 1991 crises that almost crippled Indian Economy.

Disadvantages: it is a breeding ground for inflation since the supply for rupee is in excess and it will result in demand full inflation. It hurts common man as we are seeing now in present situation were average Inflation if 14%. India being a developing economy it needs machinery , tools and other manufactruing equipments to build roads, railways, water cannals etc....which are imported mainly. In devalution the imports become costly because u have to shed more rupee for every dollar imported.

In short :Devaluation means artifically bringing down the value of rupee against alien currency.

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