In 1991, as an immediate measure to resolve the balance of payments crisis, the government lowered the value of the rupee against foreign currencies. Today the rupee’s value is mostly determined by the demand and supply of foreign exchange. Suppose Indian imports rise sharply and, as a result, the rupee loses value. The fall in 1991 and the fall caused by rising imports are called, respectively:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → devaluation; depreciation
In 1991 the government lowered the rupee’s value as an immediate measure. A fall made by the government is a devaluation.
Today the market sets the rupee’s value. When imports rise, the demand for foreign exchange rises, and the rupee loses value. A fall caused by market forces is a depreciation.
Both words mean a fall in the rupee’s value. They differ in who causes it: devaluation is a government decision, while depreciation comes from demand and supply in the market.
This question uses Liberalisation, Privatisation and Globalisation: An Appraisal and Open Economy Macroeconomics together.
NCERT (2026-27): “Foreign Exchange Reforms: The first important reform in the external sector was made in the foreign exchange market. In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange. It also set the tone to free the determination of rupee value in the foreign exchange market from government control. Now, more often than not, markets determine exchange rates based on the demand and supply of foreign exchange.” Open Economy Macroeconomics, 6.2.2 Determination of the Exchange Rate: “When income increases, consumer spending increases. Spending on imported goods is also likely to increase. When imports increase, the demand curve for foreign exchange shifts to the right. There is a depreciation of the domestic currency. …” Open Economy Macroeconomics, Fixed Exchange Rates: “… In a fixed exchange rate system, when some government action increases the exchange rate (thereby, making domestic currency cheaper) is called Devaluation. …” |