Economy; Rupee, Devaluation of currency and Inflation

  • Rupee was first minted in India during the reign of Sher shah suri.
  • India became member of IMF in 1947 and exchange value of rupee came to be fixed by IMF standards.
  • All coins and the one rupee notes are issued by the government. It bears the signature of the finance secretary government of India.
  • Symbol of rupee came into use from 15th July 2010.
    • Designed by D udaya kumar.
    • Is an amalgamation of devnagari “Ra” and the roman “R” without the stem.
  • Devaluation of currency refers to reducing value of the Indian rupee in comparison to the leading currencies in the world market.
    • The history of devaluation of Indian currency is as follows –
DevaluationYearByFinance minister
1stJune 194930.5%Dr. John Mathai
2ndJune 196657%Sachindra Chaudhary
3rd1st July 19919%Dr. Manmohan Singh
4th3rd July 199111%Dr. Manmohan Singh
  • Basic objective of devaluation is to reduce deficits in balance of trade by making exports relatively cheap and imports costly.
  • Hard currency –
    • It refers to that currency which is traded in foreign exchange market for which demand is relative to the supply.
  • Soft currency –
    • It refers to that currency which is expected to vary irregularly or decrease in value against other currencies.
  • Inflation –
    • Is the state in which prices of goods and services rises on the one hand and value of money falls on the other.
    • When money circulation exceeds the production of goods and services the state of inflation takes plane in the economy.
  • Types of inflation –
    • Demands pull inflation.
      • Created and sustained by excess of aggregate demand for goods and services over the aggregate supply.
      • Or when increase in production lags behind the increase in money supply.
    • Costs pull inflation.
      • This is created and sustained by increase in cost of production which is independent of the state of demand.
      • E.g. trade unions can bargain for higher wages and hence contribute to inflation.
    • Stagflation.
      • There is fall in the output and employment levels.
      • Due to various pressures the entrepreneurs have to raise the price to maintain their margin of profit. But as they only partially succeed in raising the prices, they are faced with declining output and investment.
      • Thus on one side there is a rise in the general price level and on the other side there is a fall in the output and employment.
    • Hyper inflation / Galloping inflation.
      •  There is very rapid growth in the rate of inflation in which money loses its value to the point where alternative mediums of exchanges such as barter or foreign currency are commonly used.
  • Measurement of inflation –
    • It is measured by general price index (GPI).
    • GPI measures the changes in average prices of goods and services. A base year is selected and its index is assumed as 100 and on this basis, price index for the current year is calculated.
    • If the index for the current year is below 100, it indicates the state of deflation and on the contrary, if index is above 100 it indicates the state of inflation.
  • Wholesale price index (WPI) –
    • It measures the change in wholesale prices on weekly basis.
    • On the basis of weekly indices average annual WPI is worked out.
    • An average annual wholesale price of the base year is assumed as 100.
  • Deflation –
    • Value of money rises and the price of goods and services falls.
    • Deflation may occur due to following reasons –
      • Government withdraws money from circulation.
      • Government imposes heavy direct taxes or takes heavy loans from the public (voluntary or compulsory or both).
      • When central bank sells the securities in open market (which reduces the quantity of money in circulation).
      • When the central bank increases the bank rates (which curtails the quantity of credit in the economy).
  • Measures to check deflation –
    • Increase money supply.
    • Promote credit creation by the banks.
    • Curtailment in taxes so as to increase the purchasing power of people.
    • Increase the public expenditure and to increase the employment opportunities in the economy.
    • Increase money supply in circulation by repayment of old public debts.
    • Provide economic subsidy by the government to the industrial sector of the economy
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