Q.What do you understand by devaluation of rupee?
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Start your 14-day free trial to unlock the full solution →Devaluation of the rupee is a deliberate, official lowering of the rupee's value against foreign currencies by the government. It makes the rupee cheaper, so exports become more attractive and imports become costlier. India devalued the rupee in 1991 to correct its balance of payments and boost foreign exchange earnings.
Meaning of devaluation
The external value of the rupee is the amount of foreign currency it can buy. Devaluation is an official decision by the government to reduce this value, so that the rupee exchanges for less foreign currency than before. After a devaluation, more rupees are needed to buy the same unit of a foreign currency; in other words the rupee has been made deliberately cheaper.
Devaluation in the context of the 1991 reforms
At the time of the balance of payments crisis, India needed to earn more foreign exchange and spend less of it. As part of the trade and foreign exchange reforms, the government devalued the rupee against foreign currencies. This led to an increase in the inflow of foreign exchange.
Effects of devaluation
- Exports become cheaper: Because the rupee is worth less, Indian goods cost foreigners less in their own currency, so foreign buyers are encouraged to buy more Indian goods. This boosts exports.
- Imports become dearer: Foreign goods now cost more rupees, so imports are discouraged. This helps reduce the outflow of foreign exchange.
- Improved foreign exchange position: With higher exports and lower imports, more foreign exchange flows in, which helps correct the balance of payments. …
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