Impact Of Currency War On Indian Economy

1747 Words 7 Pages
"Currency War and its Impact on the Global Economy"
1.) Introduction:
Currency war or competitive devaluation, is a situation in which countries try to gain a trade advantage over other countries by causing the exchange rate of the domestic currency to fall in relation to other currencies. Every country would want to prosper, but why does it depreciates its currency? There are 3 reasons: Firstly, to boost the exports. Secondly, to reduce the trade balance deficit and thirdly to reduce the debt burdens. It is a global phenomena and has various positive and negative impacts. For developing countries it is a loss situation at the time of implementation( appreciation of currency and loss of competitiveness as well as removal(depreciation and
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It might sound different, but a strong currency necessarily does not serves in a nation's best interests. Today value of one dollar is equal to sixty seven rupees. If India wants it could bring down the value of dollar in comparison to rupees by tweaking its economic policies, but this will reduce India’s profit which it earns from various sources such as IT exports, FDI, Tourism etc.Therefore, India does not appreciates its currency. A country’s weak currency makes its exports more competitive in the international markets, and the imported products more expensive. Higher export volume encourages economic growth and lower value of domestic products makes consumers behave rationally and give preference to local alternatives in comparison to imported one. This leads to a lower current account deficit, higher employment, and faster GDP growth and reduce debt burden. Cheaper exports and expensive imports improves the trade balance situation as there is capital inflow in the country but at the same time it also increases the debt burdens because of currency depreciation and it reduces confidence among the people in the developing countries like India, Argentina etc. A weak currency will make the debt payments less expensive if these payments are fixed in advance. If the domestic currency is devalued to half of its initial value, the $1 million debt payment …show more content…
The positive aspects of currency war are increase in export and decrease in export profitability,cheapening of credit and increase in bank solvency. Whereas , the negative aspects are instability in the financial markets, increased risk of speculation,rise in asset variability, excess of credit expansion. The currency war mechanism includes quantative easing, fall in interest rates, devaluation of domestic currency etc. which leads to huge fluctuations in the balance of payments(Robert 2014). One should have mentioned here the miscellaneous factors like how the expectations about the future exchange rate , fluctuations in the prices of oil and the cross border inflows and outflows affects these rates to some extent. Expectations play an important role and helps in forecasting the behavior of a variable and should be taken into account through past

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