How Many Times Has The Indian Rupee Been Devalued?

The Indian Rupee has been devalued three times by the Indian government in the past.

What Is Devaluation?

Devaluation is the intentional devaluation of a country's currency relative to another currency, currency group, or currency standard. Countries with fixed or semi-fixed exchange rates use this monetary policy tool. Often confused with depreciation, it is the opposite of revaluation, which refers to the readjustment of a currency's exchange rate. In other words, a currency is said to be devalued when it loses its value relative to other currencies in the foreign market. The devaluation of the currency can also be said to be the result of their monetary policy.

Devaluation Background

• In the 1960s, the inability of the currency to fluctuate to reflect changing macroeconomic conditions between the United States and the rest of the world led to rising inflation in the United States, putting pressure on the fixed exchange rate system.

• In 1973, the United States and several other countries switched from a fixed exchange rate system to a floating exchange rate system.

• However, some countries continue to use fixed exchange rates to achieve economic goals such as price stability.

• The 1976 amendment to Article 4 of the IMF(International Monetary Fund) Charter stipulates that policymakers should avoid manipulating exchange rates to gain an unfair competitive advantage over other member countries.

Why Does Devaluation Happen? (Pros Of devaluation )

Devaluation occurs due to the following reasons:

• For boosting exports
• To shrink trade deficits and,
• For lowering the cost of a country’s debt

Trade imbalances are the main reason countries devalue their currencies. Lowering the value can lower a country's export costs and ultimately make it more competitive on a global scale. Also, due to rising import costs, domestic consumers are less willing to buy higher-priced goods from foreign firms and instead buy lower-priced goods domestically.

Increased domestic spending promotes the circulation of money within a country's economy. Eventually, the trade deficit will decrease as lower prices will start to increase exports and higher prices perceived by domestic consumers will reduce imports. A local currency devaluation can therefore reduce the deficit through strong demand for cheaper exports and more expensive imports.

Also, when government-issued public debt is high, the government can encourage devaluation of the currency, which hurts the economy. Devaluing a currency makes debt payments cheaper over time.

For example, if a government devalues its currency, the nominal interest payment would be reduced if the government had to pay $2 million in interest each month on current debt. For example, if the currency were halved in value, the interest payment in real dollars would be only $1 million.

Such tactics do not work for bonds issued in another currency, as local currency devaluation ultimately increases the cost of servicing foreign debt.

Cons Of Devaluation

Devaluation can lead to price increases for products and services over time. Rising import prices encourage consumers to buy goods from domestic industries. However, the degree of price increase depends on the competition between supply and overall demand.

An increase in exports due to a weaker currency increases aggregate demand, which in turn increases gross domestic product (GDP) and inflation. Inflation is taken into account as suppliers face higher import prices, prompting manufacturers to raise their costs or market prices.

In addition, devaluations can also increase market uncertainty. Market uncertainty can adversely affect supply and demand due to a lack of consumer confidence, leading to economic recession over time. Moreover, devaluation can also trigger trade wars.

Real-World Examples Of Devaluation

China has been accused of practising quiet currency devaluation and trying to become a more dominant force in trade markets. He accused the United States (U.S.) of secretly devaluing the currency and appeared to cooperate with the United States. However, after taking office, U.S. President Donald Trump responded in part to China's stance on the yuan by selling cheap Chinese goods. threatened to impose tariffs on Some fear this could lead to a trade war, and that if the U.S. weathers it, it could put China in a position to consider more aggressive alternatives.
President Trump imposed restrictions on Chinese goods, including tariffs on more than $360 billion worth of imports. However, according to The New York Times, the strategy backfired with the COVID-19 pandemic that wreaked havoc in 2020. China's strong manufacturing position strengthens as global supply chains do not return to the U.S. and consumers worldwide plunge into stay-at-home orders, stay at home and purchase Chinese-made goods through online e-commerce sites was done.
Egypt faces constant pressure from trading in the illicit US dollar market after a shortage of foreign exchange affected domestic businesses and discouraged investment in the economy.

Devaluation Of The Indian Rupee

The Indian Rupee has been devalued three times by the Indian government in the past. The Indian Rupee was devalued in 1949 due to a lack of funds within the government. The 1966 war between China and Pakistan resulted in the devaluation of the Indian Rupee. The Indian government devalued the rupee again in 1991 during the financial crisis. At the time of independence, one can buy a dollar with one Indian rupee but today you have to spend 82.41 rupees to buy a dollar, and not to forget the value keeps changing.

Impact Of Devaluation On The Indian Rupee

• Inflationary pressure- India is trying to keep double-digit inflation under control. But devaluation makes it harder to control inflation. A devaluation would increase the price of imports such as oil and fuel, leading to cost inflation. Moreover, devaluation is seen as an "easy" way to regain competitiveness. Currency depreciation may therefore reduce incentives for exporters to improve their long-term competitiveness. Finally, the devaluation will help boost domestic demand. Exports will increase and consumers will switch to domestic producers rather than imports. This can lead to demand-pull inflation.

• Economic Growth- A currency devaluation could boost domestic demand and short-term economic growth. However, this does not necessarily help the Indian economy. The Indian economy needs to focus on improving productivity and long-term capacity rather than relying on stimulating domestic demand. Rapid currency devaluation has also led to a loss of confidence among domestic and foreign investors. Foreign investors will be more sceptical about investing in India due to its rapid write-down history. The impact of devaluation and inflation will also deter domestic investors. Businesses worry about future oil prices. This decline in investment is detrimental to long-term economic growth.

Conclusion

Devaluation involves intentionally lowering the official exchange rate and devaluing the currency. It increases the inflow of capital into the country and thus exports the competitiveness of goods. However, a devaluation could also slow economic growth and accelerate inflation.