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REASONS & EFFECTS OF
          DEVALUATION OF CURRENCY




                          PRESENTED BY:
                             KIRAN KUMAR
                             AMIT KUMAR
                             NARESH
                             NAVYA
IIPM (SS 11-13)
What is Devaluation?




IIPM (SS 11-13)
“one country's currency is reduced in value in comparison
                   to other currencies”




IIPM (SS 11-13)
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)
TYPES


1) Planned devaluation
2) Market-driven devaluation




  IIPM (SS 11-13)
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


   IIPM (SS 11-13)
EFFECTS OF DEVALUEATION


• Improve trade balance

• Alleviate balance of payments difficulties

• Expand output and employment




  IIPM (SS 11-13)
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 exp

Production increases                   Per capita income
                                       increase

                                                                Profit
   Export increases
                                                                improves


                                     Consumption
          Price fall
        IIPM (SS 11-13)              increase
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.

  IIPM (SS 11-13)
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)
THANK YOU




IIPM (SS 11-13)

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Devaluation of money (India)

  • 1. REASONS & EFFECTS OF DEVALUATION OF CURRENCY PRESENTED BY: KIRAN KUMAR AMIT KUMAR NARESH NAVYA IIPM (SS 11-13)
  • 3. “one country's 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. TYPES 1) Planned devaluation 2) Market-driven devaluation IIPM (SS 11-13)
  • 6. 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 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 exp Production 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 India's 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)