Hazards Of Devaluation Of Currency

Decrease in the value of a nation’s currency in comparison to other currencies is called devaluation. This refers to any sanctioned decrease in a currency’s value under a fixed exchange rate regime. Hence, it is considered a one-time event. However, it may happen time and again. In such scenarios, the change is usually mandated by the government or central bank of a nation.

Devaluation is a decision taken under various circumstances owing to a few advantages. One of the main reasons is that exports become cheaper and more competitive to foreign buyers. It boosts domestic demand and generates job opportunities in the export sector. Also, higher exports and aggregate demand (AD) have the potential to enhance economic growth. Further, to restore competitiveness, devaluation is a better alternative compared to internal devaluation. 

However, devaluation can also have detrimental effects on the economy. Reputed global finance companies like Unimoni, from where one can buy Forex online in India, believe that devaluation can impact the economy in a number of ways. Mentioned below are the potential dangers of currency devaluation:  

1.The chances of inflation are very high during devaluation because of the following reasons:

2.Devaluation has a huge impact on the purchasing power of citizens abroad. 

3.Reduced real wages: Between 2007 and 2018, this was an issue in the UK. It was a period of low wage growth when devaluation increased the import prices.

4.When international investors witness a large and rapid devaluation, they refrain from investing. Since devaluation reduces the real value of their holdings, the investors are less interested in holding government debt. In some cases, capital flight is a possibility due to rapid devaluation.

5.In case of debts like mortgages in foreign currency, there will be a sharp rise in the cost of the debt repayments after devaluation. Once, when many people had taken out a mortgage in foreign currency in Hungary, paying off Euro denominated mortgages became very expensive after devaluation. 

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