The Indian rupee is experiencing its worst slump in four years. Since the start of 2022, the currency has depreciated by more than 7% against the U.S. dollar, weakening past a historic low of 80 to a dollar mark earlier this week. While the Indian currency is not alone in faring poorly against the greenback, with even the historically strong euro and the British pound taking a hammering and weakening by more than the rupee has, the fact that other currencies too have appreciably lost value against the dollar can only offer cold comfort to India’s real economy. Domestic manufacturers and services providers are now having to cope with not just higher dollar prices for the raw materials, equipment or other supplies they may need to procure from overseas, in the wake of the supply disruptions caused by the pandemic and the war in Ukraine, but they also face mounting import bills — the slide means they have to fork out more rupees for the same dollar price from even just a few months ago. The Finance Minister and the RBI Governor have sought to explain the proximate causes for the pressure on the currency and allay apprehensions that the rupee may be in a ‘free fall’, a scenario that could ultimately prove rather damaging for macro-economic stability by spurring imported inflation at a time when both fiscal and monetary authorities are battling to tame runaway inflation. While the Minister’s statement in the Lok Sabha cited factors including the Russia-Ukraine conflict and soaring crude oil prices as major drivers of the rupee’s depreciation, Governor Shaktikanta Das on Friday acknowledged concerns about the rupee and pointed to the fact that foreign portfolio investors were “selling off assets and fleeing to safe haven” in the wake of global monetary policy tightening.

Devaluation of currency is a component of which of the following exchange rate system?

Fixed exchange rate system

Devaluation refers to the decrease in the value of domestic currency by the government through its policies under the fixed exchange rate system