Devaluation of a currency means official lowering of the value of a country’s currency within a fixed exchange rate system. What can be the reason(s) for a country devaluating its currency?

  1. It promotes country’s export and brings down imports.
  2. It helps in correcting current account balance of the country.
  3. It helps to reduce inflation.

Select the correct option from codes given below:

Answer: [B] 1 and 2 Only

Only first and second statements are correct. Current account deals with the trade of goods and services between two countries. The devaluation of a currency will make imports costlier and export cheaper; thus promoting export and retarding import. Furthermore, a higher export will earn higher foreign exchange in return and will enhance current account of the balance of payment. Devaluation of the currency will increase the inflation in the country because imports being costlier will become lesser and maximum export of country’s goods and services outside will lead to deficit of goods and services within the country; this will bring situation of more money chasing few goods and hence prices of goods will become higher within short period of time causing inflation.

This question is a part of GKToday's Integrated IAS General Studies Module