Devaluation of Rupee - Know its impact & how it affects exports and money flow Video Lecture | Indian Economy for Government Exams (Hindi) - Bank Exams

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hello everyone and welcome to study IQ
in this session we will discuss about
the devaluation of rupee so far we'll
have completed almost twenty five-plus
classes and if you find any difficulty
in finding them on the youtube you can
go to my facebook page you will find all
the previous videos so let us start the
evaluation of rupee so what is meant by
devaluation of rupee or what is the
evaluation the evaluation is a process
by which the central bank of an economy
reduces the value of a particular
currency in respective of other
currencies so under devaluation a
particular currency loses value which
means the value decreases in comparison
to other currencies in the forex market
so this is in comparison to other
currencies in the forex market two
things you should note here is first of
all this is a monetary policy this is a
monetary policy which means that
monetary policy is taken by the central
bank of an economy monetary policy is
adopted by the central bank so in case
of India RBI is responsible for the
evaluation of rupee okay and secondly
this is a conscious effort made by the
central bank of an economy which means
that this is not automatic but this is
consciously done what does this mean
automatically means demand and supply or
the market will be responsible for the
change in value decrease or increase in
the value of a particular currency so
how does this market do when there is
less demand for a currency the value of
the currency decreases and this is an
automatic process this is known as
depreciation of currency so when this is
done automatically by the market with
the help of demand and supply forces we
call it as depreciation and when there
is increase in demand effect particular
currency this will lead to increase in
the value of that particular currency
and this is now
appreciation so you must remember here
that appreciation and depreciation are
automatic processes which means that the
central bank will not do it consciously
this is done automatically by the market
forces which are the market forces
demand and the supply so when demand
increases for a particular currency the
value will obviously increase so when
demand is more the value is also more so
this will lead to appreciation or
increase in the value of the currency
and lessen demand for a currency will
reduce the value of the currency and
this will lead to depreciation of the
currency
so both depreciation and appreciation
are automatic processes and here we are
learning about devaluation so as we said
devaluation is a conscious effort made
by the central bank of an economy so in
case of India the Reserve Bank of India
makes conscious effort to decrease the
value of currency so here the value of
currency is decreased and this is a
conscious effort from the side of the
Reserve Bank of India on the other hand
we also have a revaluation what is the
revaluation this is just opposite of
devaluation means there is some Bank of
India or the central bank of an economy
consciously tries to increase the value
of the currency so this is revaluation
and our topic for discussion
today's devaluation hope this is clear
so why does the Reserve Bank or the
central bank would evaluate a currency
or decrease the value all these things
we will discuss later in this session
itself now let us see what are the
causes of devaluation one important
reason is lack of competitiveness or
inflation the lack of competitiveness
means that the prices are high or the
commodities have higher prices in the
market so it means the competitiveness
is less because when prices are high it
means that lack of competitiveness in is
in the market so this will lead to
inflation how increase in prices so
inflation is the persistent
in the prices of commodities so this
will lead to inflation in the economy we
have already discussed about inflation
various types courses of inflation etc
and some other module so if you have no
clarity about inflation please go back
to my previous videos on inflation which
is available in my Facebook page so
please go back and watch that video you
will get more clarity on this topic
another reason is the increasing current
account deficit so increase in current
account deficit what is meant by current
account deficit it means that the
imports are more than the exports so
water is coming into the country is more
than what is going out of the country so
imports is more than the export this
will lead to current account deficit so
a widening current account deficit is
also a course for devaluation of
currency again the increasing prices of
oil so we all know that India is a net
importer of oil so we are dependent on
imports for our oil or fuel requirement
so with the increasing price of oil
again the currency will lose its value
now let us see an important term that is
devaluation spiral this is a simple
concept it is very easy to understand
the concept says that devaluation is
like a spiral which means it never ends
and let us see how it happens we have
already discussed that inflation is one
reason for devaluation so inflation will
lead to devaluation again when there is
devaluation of the currency the value of
the currency decreases and this will
lead to further increase in prices of
the commodities and this is again known
as inflation so again devaluation will
cause inflation in the economy so high
inflation in the economy causes
devaluation when there is more demand in
the economy we have already said there
are two types of inflation one is demand
pull inflation the other one is cost
push inflation so see when there is
demand pull inflation it means that
aggregate
the economy's high so demand is more
than the supply so what happens the
prices increases so there will be
devaluation the economy so again during
the evaluation what happens the prices
of commodities increases so this will
increase the cost of production of the
commodities so increase in cost of
production will lead to cost push
inflation so this cycle continues this
is known as the devaluation spiral now
let us see what are the impact of
devaluation in the economy first of all
it will give a inflationary tendency in
the economy inflation let's see how
during the evaluation what happens with
exports and imports exports imports let
us see before going into that let us see
what really happens during devaluation
suppose the value of currency was sixty
rupees for one dollar so one dollar
equal to sixty rupees and during the
evaluation what happened the central
bank of the economy reduce the value of
currency which means that now it is
sixty five rupees for one dollar what
does this mean this means that earlier
with sixty rupees you were able to
purchase one dollar but now there is
revaluation which means the value of
Indian rupee has come down so now you
need to pay 65 B's in order to buy one
dollar and now see how does this affect
the exports and the imports exports
means you are sending to another country
and when the value of rupees less what
will happen if suppose you are exporting
$100 commodity commodities for hundred
dollars so earlier before the
devaluation the value of the currency
was sixty rupees see from this example
before revaluation the price the value
is sixty rupees so here you are
exporting $100 commodity so before the
devaluation sixty in two hundred will
give you six thousand so your in
commerce six thousand rupees and after
valuation what has happened the value of
Indian rupee has come down and we will
see that now will be 65 apiece so you
will get 65 in 200 which means you are
earning 6500 coming to the imports
suppose the same hundred dollars you are
importing one hundred dollars commodity
so before devaluation one dollar was 60
so 60 in two hundred six thousand you
need to paint six thousand now it is
sixty five rupees for one dollar so 65
in two hundred equal to six thousand
five hundred see coming to the exports
you will see that during the evaluation
the exporters gained all the income of
the exporters is high seeing in this
example or else it was six thousand
rupees now it is six thousand five
hundred you are getting it so exporters
are earning this money and coming to the
imports you will see that earlier you
had to pay only six thousand rupees now
you have to pay six thousand five
hundred rupees so it means the imports
have become more expensive and we have
already said that India is highly
dependent on our oil and fuel
requirements for imports so during
inflation what happens the price of
imports goes up or you have to pay more
for your inputs this will lead to
increase in the cost of production of
commodities so this will lead to
increase in cost of production and you
have already learned in your inflation
module that increase in cost of
production will lead to cost push
inflation in the economy so this will
lead to cost push inflation in the
economy certainly the competitiveness of
the exporters also will come down how we
have already seen that during
devaluation the exporters are tend to
gain more money so what happens in order
to gain short-term returns there
compromise on quality or infrastructure
investments exeter now they know that
the value of the indian rupee is less so
they are going to gain from exporting so
in order to increase their quantity of
the export what they will do is they
will compromise on the quality or they
will compromise in the investment or
infrastructure so this will lead to
lessening of the competitiveness of the
exporters but this is in the long run
long run you must understand here that
in the short run it is definitely going
to benefit the exporters so there is
obviously a short-run benefit or
short-term benefit but in the long run
they are going to lose in terms of
competitiveness again we have seen that
exports will increase because there is
more income for the expert us so
exporters will try to increase their
exports so in the economy or in the
domestic market what will be the effect
of that exports have increased so in the
domestic economy aggregate demand will
be more than the aggregate supply
because there is a shortage why is this
shortage because exports are more
because of increasing exports in the
economy there will be shortage of
commodities and when aggregate demand is
more than the aggregate supply we have
seen there will be demand pull inflation
in the economy so the supply is not
enough to meet the domestic requirements
and this will lead to demand pull
inflation which means the prices of
commodities in the market will increase
another impact of devaluation is that
this will result in the loss of
confidence in the international as well
as domestic investors so in case of
investors they will lose the confidence
in the economy why because the value of
the currency is changing so there is no
stability of the currency so there is no
stability for the currency so with
devaluation the value of the currency is
coming down so thus currency is not
stable
therefore the economy also will not be
much stable so this will harm the
confidence of the in
whether it be domestic investors or
international investors so as a result
what will happen investment in the
economy will come down this will lead to
lesser growth and development in the
economy so with lesser investment the
productivity or the output will come
down this will definitely affect the GDP
of the country also investments can be
in the form of infrastructure and
technology as well this will affect the
development of the country as well
another impact is that it will reduce
the purchasing power we said that there
will be inflationary trend in the
economy so what happens during inflation
inflation is the persist in rise in the
prices of commodities so prices of
commodities will go up this means that
the purchasing power of the households
comes down let us take an example
earlier the price of 1kg Apple was 100
rupees a person has thousand rupees
income this is just an assumption so he
used to purchase 10 kilogram of Apple so
his purchasing power is 10 kilogram but
now there is inflation in the economy
the prices has gone up inflation means
increasing prices so now the price of
Apple is 125 rupees per kg and his
income is the same thousand rupees so
now will he be able to buy the previous
10 kilograms of Apple no he will not be
so now he'll be able to buy only 8
kilogram of Apple 8 kilograms of Apple
this means the purchasing power of that
household has come down so what does
this infer when the purchasing power of
a person comes down this will affect the
standard of living of that person
standard of living also comes down so
this will have a negative impact on the
standard of living of that individual
now let's see how it affects the
economic growth in the short run this
will boost the domestic demand therefore
this will result in short-term economic
growth we have seen in case of exporters
they are earning more means that
Konami has small income but what happens
this is only for the short term in the
long run this is not effective so we
have already seen that devaluation is
done consciously consciously by the
central bank of an economy in case of
India it is the RBA now let us see what
can be the reasons our bay would reduce
the value of the Indian currency or why
are they would adopt devaluation one
reason can be to curb the excess imports
in the economy excess imports can be
curbed so we have seen during the
evaluation imports become expensive and
exporters gain so this will result in
increase in the prices of imports so
sometimes the RBA wants to decrease the
rate of imports into the economy for
example Gold so when there is more
important to the economy what will
happen so imports more than exports will
result in current account deficit and
widening of current account deficit the
more the imports compared to the exports
the current account deficit will also
widen so in order to avoid this
sometimes the RBA will adopt devaluation
and in case of gold this is not a
productive asset so there is no economic
growth or development associated with
the purchase of gold this will only
increase or widen the current account
deficit sometimes if the RBA feels that
the import of gold into the economy is
harming the economy or increasing the
current account deficit of the country
it will devaluate the currency secondly
the are bake and evaluate the currency
if the RBA feels that Indian goods and
services needs a competitive edge in the
world market or global economy so in
order to give a competitive edge how it
is possible we have seen that during
devaluation export become cheaper and
exporters gain so this can also be one
reason for example tourism or exports
export of certain commodities in case of
tourism are big and also adopt
devaluation if it feels that there is a
water stabilization required in the
economy so this can be used as a short
term stabilization method by the central
bank now let us see the case of China
China is one country that regularly or
frequently devaluates its currency why
this is done this is done because the
exports may become cheaper or the
exporters in Chinese economy will gain
more so the exports from China will
increase and they can increase the forex
reserves also so devaluation is one
incentive given by the Chinese
government to the exporters of Chinese
economy so which means that now the
exporters will be motivated to export
more and to other economies and this
will boost the exports of the country
and this will help them in forex
reserves or gaining forex so we have
seen that the evaluation is a measure to
decrease the value of currency in order
to stabilize the economy for various
reasons stabilize the economy and we
have also seen that this is a short-term
measure so let us see what can be done
in the long term to stabilize the
economy so in the long term what are the
measures or solutions to stabilize the
economy one solution is capital inflows
which means that more capital should
come into the economy from other
countries in the form of FDI and FII
preferably FDA why because fi is
volatile anytime they can take them back
because investing in a fire a means
investing in the shares and equities of
Indian companies and they and the
investors can take this capital back to
their own economy anytime so this is not
a very reliable source of foreign
capital but FDA means investment in the
infrastructure so this cannot be taken
back very easily so this is more
appropriate
another solution could be increasing the
exports so increasing export
result in more Forex of the country so
when a country has more forex reserves
thus the currency of the country will
also be the value of the currency of
that particular country will also
increase the country's currency will
have more stability or other ways we can
say that the demand of the currency is
high which means that when demand is
high the value also will be high so more
exports more will be the forex reserves
of that country which means the demand
of the currency will also be high and
this will lead to increase in the value
of currency so here you can remember the
Chinese example so China has increased
its exports in order to maintain more in
the forex reserves and to stabilize
their currency another solution is
reduce the imports of the country
imports should be reduced especially in
those commodities which do not help in
growth or development for example gold
so we have seen that gold will not help
in any growth or development of the
economy it will only add on to the
current account deficit so such import
should be reduced the government should
make measures to reduce the import of
such commodities another solution is to
bring in supply side policies to
increase the competitiveness another
solution could be to reduce the
dependency on imports for oil this is a
long-term measure you cannot attain
Indian economy cannot attain this in a
short run this is possible only in the
long run for this what can be done
renewable sources of energy or domestic
sources of energy should be developed so
this will require long term measures
this cannot be attained in the short run
another solution is to implement
monetary policies to tackle inflation
and reduce the domestic demand here you
must understand two things reducing
inflation and reducing domestic demand
first inflation so we have already
learned in the inflation module that a
moderate level of
fallacious necessary for growth and
development of an economy so inflation
can be reduced but not below a certain
level so this must be taken care of and
second things reduce the domestic demand
so reducing the domestic demand can be a
short-term measure but not in a
long-term buy because when the demand in
the economy decreases what will happen
this will lead to decrease in supply
also we have seen this in microeconomics
to maintain the equilibrium that then
demand decreases supply also decreases
decrease in supply means that production
or output has decreased so when the
output decreases what will happen this
will reduce the GDP of the country so
oneness GDP will come down and secondly
what happens then output our production
reduces employment also goes down or the
rate of employment growth goes down or
it will create unemployment now there is
lesser output so the form does not need
as much as employees they are required
before so they will cut down on the
number of employees so there will be the
issue of unemployment also so this has
multiple effects one is GDP of the
country will decrease which means the
growth of the country has come down
secondly employment rate will come down
or it will lead to unemployment in the
economy so reducing the domestic demand
is only a short-term measure in the long
term you cannot adopt it next is the
financial control measures example of a
financial control measures reducing the
limit of gold imports so this is all
about devaluation of currency but if
this module has to be very clear you
must have a clear idea about inflation
also you should also know what is demand
water supply and also what is market
equilibrium so if you know all these
terms there will be a better
understanding you can find my videos on
inflation as well
microeconomics and if it is difficult
for you to find those videos in the
YouTube you can go to my facebook page
you will find all the videos there also
after going through this video please
try to answer this question I am giving
you right now
you
you can write down the answers and in
box it to me in my Facebook page I'll
correct them and get back to you
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