Devaluation & Depreciation

Devaluation means officially lowering down the value of a country’s currency, within a fixed exchange rate system. The government decides what the currency should be worth, compared with that of other countries. In contrast, depreciation describes the decrease in the currency’s value, due to forces of market. The exchange rate among various currencies changes every day, as the investors re-evaluate new information.

The two terms: devaluation and depreciation are sometimes used inter-changeably, but these two are entirely different things. However they always refer to values in terms of other currencies.

CAUSES OF DEVALUATION IN RUPEE

Lack of competitiveness: The long term decline in the value of the Rupee reflects India’s relative decline in competitiveness. In particular, India has a higher inflation rate than its international competitors. Therefore, there is less demand for the rising price of Indian goods. This reduction in demand causes a fall in the value of Rupee.

Current Account Deficit: A consequence of poor competitiveness and high demand for imported stuff is current account deficit. This means that, India is importing more goods and services than what it is exporting. A large current account deficit puts a downward pressure on the currency. This is because more currency is leaving than what is actually being received.

Growth Slowdown: India’s Gross Domestic Product is continuously falling, and the situation is much unlikely to improve. This is resulting in the foreign investors pulling outmoney out of Indian markets.

Dependence on Foreign money: India’s current account deficit is being financed by foreign money for the past many years. Withdrawal of Indian Rupee by the foreign investors is hence leading to weakening of our currency.

Capital Controls: The decision of the Reserve Bank of India and the government to impose temporary restrictions on capital flows has not gone down well with the markets, as it will not only discourage Indian investors to invest abroad, but also foreign companies from pumping money into India.

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