Question

How can depreciation of a currency be a measure of correcting disequilibrium of ‘balance of payments’?

Answer 1

Depreciation of a currency means a fall in its value relative to foreign currencies in a flexible exchange rate system. It helps correct a balance of payments deficit by making exports cheaper and imports more expensive.

When a country’s currency depreciates:

• Exports increase as they become cheaper for foreign buyers.
• Imports decrease because they become costlier for domestic consumers.

This reduces the trade deficit and helps restore equilibrium in the balance of payments.

For example, if the Indian rupee depreciates, Indian goods become cheaper abroad, leading to higher exports and lower imports, improving the balance of payments position.