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What is Devaluation of Currency & How it Impacts Countries Economy

Updated: Dec 26, 2023

Devaluation of currency refers to decline in value of home currency relative to foreign currency which is a economic policy by a country’s government to weaken the value of its currency.

For instance, exchange rate of Rupee to US Dollar is Rs. 82, however the rate changes to Rs. 83 leading to depreciation of rupee as now for 1 US Dollar Rs. 83 needs to be paid instead of Rs. 82. Devaluation is different than depreciation of currency in the sense is depreciation occurs when the value of currency declines due to market forces whereas devaluation happens when the country reduces the value itself.

The country itself reduces the value of its home currency with the purpose:

1. To Boost exports: Depreciating home currency will make exports cheaper for foreign buyers leading to an increase in exports for home country. This will provide more opportunities for growth and expansion to exporters in home country.

2. To Reduce Imports: Depreciating home currency also makes imports more expensive for importers in home country, leading to decline in home country. This will provide opportunities to domestic players (as domestic goods and services will become relatively cheaper from imported goods and services and) and home country to gain competitive edge in global trade.

3. Trade Deficit: Increase in exports and reduction in imports also helps the home country to reduce its Trade Deficit.

In the past, various countries have devalued its currency due to multiple reasons. For instance, Venezuela devalued its currency by 95% in the year 2018 to combat economic crisis and China has also devalued its currency to increase its Gross Domestic Product (GDP).

Impact on Economy of Devaluation of Currency

Currency devaluation creates both short term and long-term impact on economy.

1. Devaluation often leads to an increase in price of goods which generates inflation in the economy.

2. Improves the Trade Deficit with Increase in Exports and Decrease in Imports.

3. Can make Foreign Debt Repayments Costlier for Government and Organization


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