Currency Depreciation

Topics: Foreign exchange market, Currency, Exchange rate Pages: 5 (1593 words) Published: April 21, 2012
We discuss the currency depreciation vs. devaluation. Also, discuss the impact of currency depreciation from Indian economy perspective. Currency Depreciation & Impact

Rajesh Kanjani (34473)
SIBM Exe. MBA (2011-2014)

Currency Devaluation vs. Depreciation
The devaluation and deprecation of currency go more or less hand in hand. Currency depreciation is an economic result, whereas devaluing a currency is an act that results in currency depreciation. Many a times they are technically used interchangeably. Depreciation of Currency

* When a currency depreciates, this means that the currency has decreased in value when compared to another nation’s currency. Devaluation of Currency
* Devaluation of currency is an active economic strategy. It is sometimes used when countries are badly in debt. This occurs when a country lowers the official value of its currency in relation to foreign currencies. This is intended to raise the price of imported goods and increase the value of the country's exported goods. This can be a risky economic move because it can spark hyperinflation. Both of these concepts involve international economics and foreign exchange trading. Devaluation is a result of natural changes within the world economy. Devaluation can occur because of several different circumstances. These circumstances also might not necessarily be the fault of the country whose currency was devalued. Other countries' currencies can get stronger which results in a devaluing domestic currency. Currency depreciation is an active economic move with the desired result being devaluation of currency on the foreign exchange market. Relating Devaluation & Depreciation to Currency Regime

* In a "freely" and "managed" floating currency regime, a loss in currency value is conventionally called "depreciation", whereas an increase of currency's international value will be called "appreciation". If the dollar rises from 10,000 yen to 12,000 yen, then it has shown an appreciation of 20%. Symmetrically, the yen has undergone 8.3% depreciation. Example of Depreciation

* If you were able to get Rupee1 for every $2 on one day, then the next day you can get Rupee 1.5 for every $2, the value of the Re has decreased. This decrease is known as depreciation. To look at it another way; if country A's currency was equal to the currency of country B; you would be able to get a one-to-one exchange of each of the currencies. The next day you attempt to trade $1 of country A’s currency, and you only get $0.50 of country B’s currency in return; hence, country A’s currency has depreciated. It is now worth only half of the amount it was before in relation to country B's currency. But central banks can also declare a fixed exchange rate, offering to supply or buy any quantity of domestic or foreign currencies at that rate. In this case, one talks of a "fixed exchange rate". Under the latter regime, a loss of value, usually forced by market or a purposeful policy action, is called "devaluation", whereas an increase of international value is a "revaluation". One can call it a purposeful Governmental intervention for economic reasons. In other words currency depreciation/appreciation is controlled by the international currency rates based on the international stock market indicators; and currency devaluation is controlled by the central banks (RBI in India's case) which forces exchange rates, that subsequently devalues the currency. Alternately, depreciation is due to international economic pressures, while devaluation is done by the government. Conclusion: Under a floating exchange rate a “devaluation” is not possible as a means of improving international competitiveness but a “depreciation” is

Phenomenon responsible for present situation and its effects Currency market is driven by a basic concept of economics – i.e. demand and supply. Currencies are exchanged in the currency market. If there is high number...
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