Devaluation of money (India)

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  • 1. REASONS & EFFECTS OF DEVALUATION OF CURRENCY PRESENTED BY: KIRAN KUMAR AMIT KUMAR NARESH NAVYAIIPM (SS 11-13)
  • 2. What is Devaluation?IIPM (SS 11-13)
  • 3. “one countrys currency is reduced in value in comparison to other currencies”IIPM (SS 11-13)
  • 4. NEEDS FOR DEVALUATION• To relieve an unfavorable balance of trade.• Economic stabilization.• Correcting the price distortions.• To increase competitiveness in the foreign markets.• To raise national income and per capita.• Achieve higher standards of living.• Close the development gap.• Government policies of high tariffs on imports.• Restrictions on commodities as well as capital flows. IIPM (SS 11-13)
  • 5. TYPES1) Planned devaluation2) Market-driven devaluation IIPM (SS 11-13)
  • 6. cont…1) Planned devaluation: -Planned devaluations are brought about almost exclusively bygovernment decisions to deliberately reduce the relative value of acurrency, usually intended as a means to some improvement in thecountrys trading position.2) Market-driven devaluation: -Formal recognition by a government, frequently during a monetarycrisis, that the value of its currency relative to major world currencies—especially the dollar—has already depreciated through trading in theforeign exchange markets IIPM (SS 11-13)
  • 7. EFFECTS OF DEVALUEATION• Improve trade balance• Alleviate balance of payments difficulties• Expand output and employment IIPM (SS 11-13)
  • 8. Effects of Devaluation An import reduces Improve trade balance Reduce the smuggling Local output increase Positive bal of payments RO I Economic stabilization Govt tax improves Employment improves Increment in foreign investment Expansion of industries High standard of living Rise in Govt expProduction increases Per capita income increase Profit Export increases improves Consumption Price fall IIPM (SS 11-13) increase
  • 9. 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 Indias war with Pakistan in late 1965.The US and other countries friendly towards pak withdrew foreign aid to India. IIPM (SS 11-13)
  • 10. 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.IIPM (SS 11-13)
  • 11. THANK YOUIIPM (SS 11-13)