What is Currency Depreciation?

It refers to the decrease in the value of the domestic currency (₹) in terms of one or more foreign currencies (like $). It makes domestic currency less valuable and more is required to buy a unit of currency. For example, if the price of $1 rises from ₹60 to ₹64, then it can be said that there is a depreciation of the Indian currency.

Causes of Currency Depreciation

The main reasons for the depreciation of currency are:

• The main factors contributing to currency depreciation are easy monetary policy and excessive inflation. In order to tackle inflation, central banks will raise interest rates because excessive inflation puts pressure on the country’s currency which might result in currency depreciation. Moreover, because of inflation, there is an increase in the cost of production, which increases the cost of exports and reduces the competitiveness of a country’s exports on the world market. Thus, it ultimately leads to a deficit and currency depreciation.
• It can also be caused by political instability. Due to uncertainty in the domestic country, investors fear investing in the domestic country. For example, Due to the war between Russia and Ukraine investors fear investing in the country because of instability in the economy.
• If the country imports large amounts of products, then there will be a trade imbalance which will lead to currency depreciation.

Effects of Currency Depreciation on Exports

Currency depreciation means a fall in the price of domestic currency (₹) in comparison to foreign currencies ($). For example, earlier people could get goods worth ₹60 from a unit of the dollar, but now they can get goods worth ₹64 from 1$. It means that more goods can be purchased from India in rupees with the same amount of dollars. Thus it leads to an increase in exports from India to the USA, as exports become cheaper.