Updated on July 18, 2023
Devaluation refers to the deliberate reduction in the value of a country’s currency against other currencies in the foreign exchange market. It is a policy decision typically undertaken by a country’s central bank or government authorities. Devaluation is aimed at making the country’s exports more competitive and stimulating economic growth.
When a currency is devalued, it means that its exchange rate decreases relative to other currencies. For example, if 1 USD used to equal 70 INR, a devaluation could change it to 1 USD equaling 80 INR. This means that it now takes more units of domestic currency to purchase one unit of foreign currency.
What are the pros and cons of the devaluation of currency?
Devaluation can make a country’s exports more affordable, leading to increased competitiveness in international markets. By making exports cheaper and imports more expensive, devaluation can potentially reduce trade deficits and improve the country’s trade balance. Devaluation can stimulate economic growth by attracting foreign investment and encouraging domestic production.
Devaluation can increase the cost of imported goods, leading to higher inflation rates in the domestic economy. It can lower the value of the domestic currency, reducing the purchasing power of individuals and businesses for imported goods and services. Devaluation may undermine investor confidence, leading to capital flight as investors seek more stable currencies, which can negatively impact the country’s financial stability. If a country has significant external debt denominated in foreign currencies, devaluation can increase the burden of repayment, as it takes more domestic currency to service the debt. Devaluation can result in higher costs of living, reduced real wages, and income disparities, which may have social implications.