What is Depreciation of Domestic Currency Class 12

Looking for what is the meaning of depreciation of Domestic Currency as per the syllabus of class 12 CBSE and other State Boards.

This topic is concerned with the Balance of Payments chapter of macroeconomics Class 12.

Let’s discuss it.

What do you mean by Depreciation of Domestic Currency

Suppose the exchange rate of INR with the dollar is

₹ 60 = 1 $

Now exchange rate changes to

₹ 75 = 1 $

due to markets forces of demand and supply.

Earlier, in the foreign exchange market, ₹ 60 was enough to purchase 1 $. The foreign exchange rate rises.

Now ₹ 75 is needed to purchase 1$.

Here you can clearly see, the value of our Indian rupee with respect to the dollar has declined.

“If the value of a domestic currency with respect to foreign currency falls due to market forces of demand and supply. It is called Devaluation of Domestic Currency.”

Definition of Depreciation of Domestic Currency

When the price of foreign currency in terms of the domestic currency rises in the foreign exchange market due to market forces of demand and supply. it is termed as the depreciation of the domestic currency.

In What types of Foreign Exchange Market Depreciation of Domestic Currency possible.

Floating (Flexible) Exchange Rate:- In the Floating exchange rate market, the foreign exchange rate is decided by the market forces.

Managed Floating Exchange Rate:- In Managed Floating Exchange rate market also the foreign exchange rate is initially influenced by market forces of demand and supply. In the case of the worst situation, the central bank intervenes to stabilize the foreign exchange rate.