Devaluation

Devaluation Of India Currency

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

2. INTRODUCTION

3. 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.

4. 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.

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

6. 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.

7. 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

8. Reasons of devaluation of Indian Rupee

9. 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.

10. 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

11. 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.

12. •  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.

13. •  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.

14. 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

15. VALUATION HISTORY

16. 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

17. 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.

18. 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

19. 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

20. 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 .

21. 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.

22. 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.

23. 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.

24. 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