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DEVALUATION OF INDIAN CURRENCY
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- 2. CONTENTS • MEANING • HISTORY •REASONS • TYPES • EFFECTS • CONDITIONS FOR SUCCESS
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- 4. INTRODUCTION • Devaluation meansdecreasing 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.
- 5. 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.
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- 7. 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
- 8. 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.
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- 11. REASONSFOR DEVALUATION • Toboost exports • To discourage imports • To correct the balance of payments • To make adjustments in the currency value
- 12. 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
- 13. EFFECTS OF DEVALUATION •Effects of Devaluation on Exports • Effects of Devaluation on Imports • The J-Curve Effect
- 14. EFFECTS OF DEVALUATIONON EXPORTS • Inelastic Demand for Exports It has an adverse effect on BOP of country devaluating its currency because its export earning have decreased.
- 15. EFFECTS OF DEVALUATIONON EXPORTS • ELASTIC DEMANDFOR EXPORTS It has favourable effect on BOP of country devaluating its currency by improving the BOP.
- 16. EFFECTS OF DEVALUATIONON EXPORTS • UNITY ELASTICITY OF DEMANDFOR EXPORTS There is no effect on the BOP with devaluation.
- 17. EFFECTS OF DEVALUATIONON IMPORTS • INELASTIC DEMANDFOR IMPORTS The BOP of the devaluing country worsen with perfectly inelastic demand for imports.
- 18. EFFECTS OF DEVALUATIONON IMPORTS • ELASTIC DEMANDFOR IMPORTS It has favourable effect on BOP of country devaluating its currency.
- 19. EFFECTS OF DEVALUATIONON IMPORTS • UNITY ELASTICITY OF DEMANDFOR IMPORTS There is no effect of devaluation on BOP.
- 20. 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.
- 22. 1) Planned Devaluation 2)Market-drivenDevaluation
- 23. 1) PLANNED DEVALUATION Planneddevaluations 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.
- 24. 2) Market-driven devaluation The valueof a currency, relative to the world’s major currencies, especially the dollar, declines on its own through trading in the foreign exchange markets.
- 25. CONDITIONS FORTHE SUCCESSOF DEVALUATION • Domestic PriceStability • InternationalCooperation • Elasticity of imports and exports • Spiritof sacrificeby the people