What is Devaluation?

Devaluation takes place when the price of foreign currencies under a fixed rate regime is increased by official action. The outfall of this is that the foreigners pay less for the devalued currency and the residents of the devaluing currency pay more for foreign currencies.

For e.g. Prior to devaluation in1991, the rate of exchange was around Rs. 21 per US$. After devaluation it came to about Rs. 26 per US$. Since then the value of rupee has fallen further. In February 2002, it was Rs. 48 per US $.

   Main objectives of devaluation

Overcoming 1991 crisis.

• Acute shortage of foreign exchange reserves to meet the payment obligations, both for imports and servicing of foreign debts.
• Low rating of the country in respect of its ability to meet its debt obligations.
• Decline in foreign exchange reserves due to

(a)    Rapidly falling exports

(b)    Drastic reduction in the capital inflows from NRIs

(c)    Sharp shrinkage of remittances from the Indians working abroad.