Reasons for Devaluation of Currency

1. Exports Encouragement: Every country wants its product to be more competitive in the international market and devaluation of currency helps them do so. In case, the currency gains value, exports will be costly, creating a negative impact on demand and not be so much of a help to the home country.

2. Reduction of Debt Burden: Currency Devaluation makes the repayment of debts easy. As the currency becomes weak, it makes the payment of instalments less expensive.

3. Narrowing the Trade Deficit: A negative trade balance can affect the country’s economy adversely and can lead to borrowing. Thus, currency devaluation can encourage exports which will help the trade balance to reduce, and/or cut down its deficit balance.

Trade Balance = Exports – Imports

Devaluation of Currency| Meaning, Reasons, Effects, Example and Critical Evaluation

Sometimes there arise some situations when the value of the domestic currency tends to increase drastically and faces monetary barriers. The government and the central bank intervene with some effective monetary policies for the correction of exchange rates, trade deficits, etc. One of these practices is the Devaluation of Currency. Devaluation of Currency is a monetary policy tool practised by the government of a country in order to adjust the prevailing exchange rate.

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What is Devaluation of Currency?

Devaluation of Currency is a monetary policy tool practised by the government of a country in order to adjust the prevailing exchange rate. Currency devaluation is mostly practised in cases of fixed or semi-fixed currencies, in developing countries. Reduction of trade deficit and/or debts, encouraging exports, and discouraging imports are the essence of currency devaluation. The government of the country deliberately reduces the value of its currency in order to adjust the non-desirable exchange rate. Devaluation of Currency is also known as Forced Downward of Currency and Deliberate Devaluation Tactic. Currency Devaluation sets a new and revised exchange rate for currency. Usually, the Central Bank of the country performs this practice because Central Bank is responsible for buying and selling of foreign exchange....

Reasons for Devaluation of Currency

1. Exports Encouragement: Every country wants its product to be more competitive in the international market and devaluation of currency helps them do so. In case, the currency gains value, exports will be costly, creating a negative impact on demand and not be so much of a help to the home country....

Example of Currency Devaluation

Assume an American car on August 16, 2023, was sold at USD 12,000 in India. As of August 16, 2023, the exchange rate for USD to INR was: 1 USD = INR 83.234. On August 17, 2023, USD was devalued as compared to the INR as a part of monetary policy, and on the date, it was 1 USD = INR 83.101. Thus, the American car in India will become cheaper by INR 1,596, as shown below:...

Effects of Currency Devaluation

Currency Devaluation has many impacts on the economy of the country on a micro as well as macro level. Some of the effects of currency devaluation are as follows:...

Critical Evaluation of Devaluation of Currency

Advantages of Currency Devaluation:...