Devaluation is a downward adjustment to a country's currency value relative to other currencies. It is used by countries with fixed exchange rates as a monetary policy tool. India has devalued the rupee multiple times, such as in 1966 and 1991, to combat trade imbalances and boost exports. Devaluation makes exports cheaper and imports more expensive. This improves the current account balance but also increases prices for imports, hurting consumers and raising inflation. The effects depend on elasticity of demand and supply for exports and imports.

1. Presentation By:- Karthik S M
Guided By:- Mervin Felix Caleb
DEVALUATION

3. INTRODUCTION

4. Devaluation means reduction in the value of currency with
respect to goods, services or other monetary units with which
that currency can be changed. For example suppose the
exchange rate between rupee and dollar is Rs 50 = 1$. If this
exchange rate is fixed Rs 55 = 1$then it is called the devaluation
of rupee. This is a monetary policy tool used by countries that
have a fixed exchange rate or semi fixed exchange rate. A
country may devaluate its currency is to combat trade balances.
It means the exports are less expensive and more competitive in
the global market and the imports are more expensive so that the
people use the domestic products.
Devaluation is a term which is different from depreciation
because the value of rupee is decreased by change in the
demand and supply of currency. But devaluation is done by
government to improve the balance of payment.

5. What is Devaluation?
Devaluation is a downward adjustment to a country’s value
of money relative to a foreign currency or standard. Many
countries that operate using a fixed exchange rate tend to
use devaluation as a monetary policy tool to control supply
and demand.

6. Reasons and History:
Devaluation of Indian Rupee
since 1947

7. At the time of independence of India, on 15 th August 1947 the
exchange rate between 1 American dollar was equal to 1 India
Rupee (1 USD = 1 INR) because that time no outside barrowings
on the balance sheet of India.
Two Major devaluation of Indian Rupee took place after
independence. India devalued Rupee for the first time in 1966. In
July of 1991 the Indian government devalued the rupee by between
18 and 19 percent. Devaluation means reduction in the external
value of the domestic currency while internal value of the domestic
currency remains constant. By Devaluate currency export gets
cheaper and import became costlier.

8. Year Exchange Rate
(INR vs. US $)
1947 1.00
1948 4.79
1965 4.79
1966 7.57
1971 8.39
1985 12.0
1991 17.9
1993 31.7
2000 45.0
2013 60.0
2016 67.63
Historical Indian Rupee Rate

9. Reasons of devaluation of Indian Rupee

10. 1. Lack of Fund: When British departed from India, Indian economy paralyzed in the absence of capital
formation and proper planning. So Indian government continuously borrowed foreign money in the form
of loan from Russia in between 1950s to 1960s,. Now the exchange rate became 1 USDINR = 4.75
2. War with China and Pakistan: India-China war of 1962, Indo-Pakistan war of 1965 and huge drought
in 1966, crippled the production capacity of the Indian so inflation increased in the economy. Indian
government needed technology to increase the domestic production, To have technology, to tackle higher
inflation and to open the Indian economy for foreign trade, government devaluate Indian Rupee in 1966.
Now exchange rate became 1 USDINR = 7
3. Political Instability and reduction in crude oil production: Assassination of P.M. Indira Gandhi also
reduced the confidence of foreigners in the Indian economy. In 1973 Arab Petroleum Exporting
Countries (OAPEC) decided to cut the crude oil production which further increased the oil import bill.
For the payment of import bill India borrowed foreign currency which reduced the value of Indian
currency. Hence all these cases bring the exchange rate at USD = 12.34 INR in 1985 and in the 1990 it
became to 1 USD = 17.50 INR.

12. Other reason includes...
Inelastic import bill of petroleum products
Import of gold in huge quantity
Import of luxury goods
Nuclear test: Pokhran-II
Asian financial crisis of 1997
Global Financial slowdown of 2007–08
European sovereign-debt crisis (2011)
4. Economic Crisis of 1991: It was the toughest time for Indian economy, India was
about to be declared defaulter by the international community. fiscal deficit was 7.8%
of total GDP, interest payment was eating around 40% of the total revenue collection of
the government, Current Account Deficit was 3.69% of GDP and WPI inflation was
hovering around 14%, To tackle all these problems government devalued Indian
currency again and the exchange rate became 1 USD = 24.58 INR

13. Effect of Devaluation on Economy
• Exports cheaper – A devaluation of the currency will make exports more competitive and
cheaper to foreigners.
• Imports expensive – Because of devaluation of rupee, the petrol, food and raw material
will become more expensive. This will reduce demand for imports.
• Improvement in current account – Current account deficit is the difference of exports
and imports. Because of devaluation the imports are decreasing and exports are increasing.
These situations reduce the current account deficit.
• Impact on common man – There would be a higher burden on the common man because
of devaluation of currency. For example – the prices of fuel, imported goods and fees of
abroad universities etc. Are increased and trips becomes costlier.

14. • Impact on infrastructure – The devaluation of rupee has negative impact on the infrastructure
sector. It increases the cost of projects by increasing the cost of raw materials like steel, cement and
price of construction equipment’s.
• Impact on agriculture – Devaluation of rupee has positive impact on agriculture. India is
world’s largest producer of wheat. So fall in the value of rupee increase the profit of Indian wheat
exporters and similarly the export of sugar, rice, cotton and edible oil etc. are increased.
• Impact on real estate – Devaluation of currency increases the cost of projects by increasing the
prices of raw material, transportation, import of construction equipment, wages and salary of labour
etc.
• Impact on Foreign Direct Investment – After the devaluation of currency the inflow of foreign
direct investment is increased. As we seen in table after the devaluation of rupee in 1991 the inflow
of FDI is increased from 409 crores to 64,193 crores.

16. • Impact on foreign investors – Foreign investors bear a loss when the value of currency is
devalued.
• Impact on Economic growth – The devaluation of rupee can only increase the short term
economic growth. But it has negative impact on the long term economic growth. Because of
devaluation, there is a loss of confidence in International and domestic investors. Long term
economic growth is affected by reduction in investment.
• Impact on Inflation – Due to devaluation, the prices of goods are increased because of imports
are more expensive and exports are cheaper. So more money is pay for the same products for
which less money is paid before devaluation. So this situation increased inflation.

17. Years FDI inflow in India
(Rs. In Crores)
1991-92 409
1992-93 1094
1993-94 2018
1994-95 4312
1995-96 6916
1996-97 9654
1997-98 13,548
1998-99 1,2343
1999-00 10,311
2000-01 10,733
2001-02 18,654
2002-03 12,871
2003-04 10,064
2004-05 14,653
2005-06 24,584
2006-07 56,390
2007-08 98,642
2008-09 142,829
2009-10 123,120
2010-11 97,320
2011-12 165,146
2012-13 121,907
2013-14 147,518
2014-15 64,193
Inflow of FDI in India: Period 1991 to 2015

18. VALUATION HISTORY

19. Exchange Rate Mechanism
All economies that interact with international
economy can be broadly classified into three
categories on the basis of exchange rate policy of
the country.
1. Fixed Exchange Rate
2. Floating (or free) Exchange Rate
3. Hybrid system

20. How does government control exchange rate?
- Control is exercised by
Actively participating in
International currency
Market through its
Central bank (reserve
Bank of india or RBI in
Our case)
- Suppose there is huge demand of rupee in
India which is driving the value of rupee.
- Also, let’s assume that RBI is comfortable
only in range of Rs 50 to Rs. 60
per US dollar.

21. The RBI will then step in the market and will offer Rs.50 for each
dollar.
• Soon other traders will have to arrive at this rate, if they want to
participate
• Since RBI has the ability to print currency notes, it can keep the lower
limit of exchange rate fixed at this value
• When demand for rupee is subsided, RBI will step back and let market
determine the exchange rate.
• In the process, RBI will have accumulated a pool of dollars; this is
called
forex reserve or foreign exchange reserve

22. Conditions for the success of devaluation
1. More than unity elasticity of demand for exports and imports
2. Sufficient supply of exports
3. Stable international price level
4. Non-competetive devaluation
5. Counter-devaluation measures
6. Spirit of sacrifice by the people

23. What Indian Government Can do, to Bring back
Positive Vibrations in Indian Economy?
1 .Allow free flow of foreign investment for the development of
infrastructure
and manufacturing sector.
2. Restrain / discourage import of non essential and luxury items
e.g. auto sector imports..
3. Restrain /discourage export of agricultural produce and basic
minerals e.g. iron ore.
4. Promote aggressively exports of manufactured goods like China
5. Promote migration of skilled personnel / work force from India..
6. Facilitate the voluntary return of the funds parked outside India.

24. A J Curve is an economic theory which states that, under certain assumptions, a
country's trade deficit will initially worsen after the depreciation of its currency—
mainly because in the near term higher prices on imports will have a greater impact
on total nominal imports than the reduced volume of imports. This results in a
characteristic letter J shape when the nominal trade balance is charted as a line
graph.

25. CONCLUSION
helps to find out the causes and effect of devaluation of Rupee. Almost all
the countries of the world have devalued their currencies at any time with a
motive of achieving certain economic objectives. So India also devalued its
currency in many times like 1966 and 1991 for achieving many objectives.
The main objectives are: - Economic stabilization, correcting the
unfavorable balance of trade, to raise the national income and per capita
also. However devaluation also affects the many parties in positive and
negative manner also. So the Govt. and RBI take the step of devaluation of
Rupee.

26. Thus, RBI should continue its policy mix of controlled intervention in
forex markets and administrative measures to curb volatility in Rupee.
Apart from RBI, government should take some measures to bring FDI
and create a healthy environment for economic growth.

27. REFERENCES
Sumeet, A. (2012). “Effect of Devaluation on Indian Currency
in Indian Economy”, International Referred Research
Journal, Vol. 3, Issue -28
Bhole, LM, 1985, Impact of Monetary Policy, Himalaya
Publishing House, New Delhi
www. Investing. Com
Rachna Yadav; Shahid Ali (2013). “Devaluation of Indian
Rupee against US$ : A Historical Perspective”, International
Journal of Advance Research in Science and Engineering
IJRARSE, Vol. 2, Issue-09