What is Depreciation?
Depreciation means a decrease in the value of a currency due to forces of demand and supply in the market using the flexible exchange rate system. The value of a domestic currency will fall when its supply in the market increases and demand falls. There are various factors that cause the depreciation of a currency. For example, if the Indian export of Rice fall due to some environmental issue (like rain) affecting the rice crops, the Indian Rupee will depreciate in value. It is because, when India exports, it obtains US Dollars and supplies the USD to obtain Indian Rupees, which ultimately creates a demand for Indian Rupees. Now, when exports reduce, the demand for Indian Rupee will fall, resulting in its value to depreciate, and making it expensive for foreign buyers in terms of their currency.
Difference between Devaluation and Depreciation
Devaluation and Depreciation are two examples of a situation when the value of domestic currency falls in terms of foreign currencies. Even though both include a reduction in the value of domestic currency, the way in which it happens is different.
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