REASONS & EFFECTS OF DEVALUATION OF CURRENCY PRESENTED BY: CA YASHODA SOMANI

What is Devaluation?

“one country's currency is reduced in value in comparison to other currencies” “one country's currency is reduced in value in comparison to other currencies”

NEEDS FOR DEVALUATION To relieve an unfavorable balance of trade.To relieve an unfavorable balance of trade. Economic stabilization.Economic stabilization. Correcting the price distortions.Correcting the price distortions. To increase competitiveness in the foreign markets.To increase competitiveness in the foreign markets. To raise national income and per capita.To raise national income and per capita. Achieve higher standards of living.Achieve higher standards of living. Close the development gap.Close the development gap. Government policies of high tariffs on imports.Government policies of high tariffs on imports. Restrictions on commodities as well as capital flows.Restrictions on commodities as well as capital flows.

TYPESTYPES 1)Planned devaluation 2)Market-driven devaluation

cont…cont… 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: - Formal recognition by a government, frequently during a monetary crisis, that the value of its currency relative to major world currencies— especially the dollar—has already depreciated through trading in the foreign exchange markets

EFFECTS OF DEVALUEATION Improve trade balanceImprove trade balance Alleviate balance of payments difficultiesAlleviate balance of payments difficulties Expand output and employmentExpand output and employment

Effects of Devaluation An import reducesImprove trade balance Reduce the smuggling Local output increase Employment improves Expansion of industries Production increases Govt tax improves Increment in foreign investment Profit improves Price fall Export increases Positive bal of payments Rise in Govt exp Consumption increase RO I Per capita income increase High standard of living Economic stabilization

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  The US and other countries friendly towards pak withdrew foreign aid to India.

THE 1991 DEVALUEAION  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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