Distinguish between devaluation and depreciation of domestic currency.
Distinguish between devaluation and depreciation of domestic currency.
Devaluation is the fall in the value of domestic currency in relation to foreign currency as planned by the government in a situation when exchange rate is not determined by the forces of supply and demand but is fixed by the government of different countries. Depreciation, on the other hand, is the fall in the value of domestic currency in relation to foreign currency in a situation when exchange rate is determined by the forces of supply and demand in the international money market. Both depreciation and devaluation result in fall in the value of domestic currency in terms of foreign currency. However, while devaluation causes a desired fall in the value of rupee (so that the exports are boosted), depreciation may cause undesired fall as may become enormously high, leading to a rise in current account deficit (CAD) and fiscal deficit to unmanageable limits.
Devaluation is the fall in the value of domestic currency in relation to foreign currency as planned by the government in a situation when exchange rate is not determined by the forces of supply and demand but is fixed by the government of different countries. Depreciation, on the other hand, is the fall in the value of domestic currency in relation to foreign currency in a situation when exchange rate is determined by the forces of supply and demand in the international money market. Both depreciation and devaluation result in fall in the value of domestic currency in terms of foreign currency. However, while devaluation causes a desired fall in the value of rupee (so that the exports are boosted), depreciation may cause undesired fall as may become enormously high, leading to a rise in current account deficit (CAD) and fiscal deficit to unmanageable limits.
