Devaluation versus Depreciation

Definition

Two ways a currency loses value against foreign currency: devaluation is a deliberate official reduction of the currency's value under a fixed or managed exchange rate, while depreciation is a market-driven fall in value under a floating exchange rate.

Key points

• Devaluation is a policy decision by the central bank or government in a fixed exchange-rate regime (India devalued the rupee in 1966 and again as part of the 1991 reforms).
• Depreciation happens through market forces of demand and supply in a floating or market-determined regime, which India broadly follows today.
• Both make exports cheaper for foreigners and imports dearer, which can widen or narrow the trade balance.
• The mirror terms under a fixed regime are revaluation (deliberate increase) and, under floating, appreciation (market-driven rise).
• It connects to the rupee, the concept current account deficit, and the wider concept balance of payments.

Why it matters for CAPF

The fixed-versus-floating distinction, the 1966 and 1991 rupee devaluations, and the export-import effects are standard external-sector facts.

Common confusion

Devaluation (deliberate, fixed regime) versus depreciation (market-driven, floating regime); appreciation/depreciation are the floating-regime terms, while revaluation/devaluation are the fixed-regime terms.

Parent note

external sector trade and bop