Devaluation 

is a reduction in the value of a currency with respect to those goods, services or other monetary
units with which that currency can be exchanged.
In common modern usage, it specifically implies an official lowering of the value of a country's currency within
a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a
foreign reference currency. In contrast, depreciation is used for the unofficial decrease in the exchange rate in
a floating exchange rate system. The opposite of devaluation is called revaluation.
A deliberate downward adjustment to a country's official exchange rate relative to other currencies. In a fixed
exchange rate regime, only a decision by a country's government (i.e central bank) can alter the official value of
the currency.
Depreciation and devaluation are sometimes incorrectly used interchangeably, but they always refer to values in
terms of other currencies. Inflation, on the other hand, refers to the value of the currency in goods and services
(related to its purchasing power). Altering the face value of a currency without reducing its exchange rate is
aredenomination, not a devaluation or revaluation.

EFFECTS

Devaluation reduces the export price in term of foreign currencies in the worldmarket. As a result the
exports are increased so as to increase the revenue of the country. When the exports are increased all
efforts are made to increase the production of the country. 
Increased demand for manufactured goods in the international market enhances incentives to the
expansion of industries.
Due to devaluation the price of imported goods in term of foreign currency goes up. So the prices of
the commodities are increased because of increase in the price of imported machinery and raw material.
The imports are reduced.
When the revenues are increased due to an increase in exports and payments are reduced due to
decrease in imports. As a result, the balance of payment of the country is corrected.
Foreigners find it cheaper to invest in devaluating country so it tends to increase the investment of foreign
capital.
Because of devaluation, we have to pay more rupees in exchange of dollars. So in this way debt is
increased.
Devaluation makes currency smuggling unprofitable. It also discourages smuggling of other goods.
Effects of Devaluation
A significant danger is that by increasing the price of imports and stimulating greater demand for
domestic products, devaluation can aggravate inflation. If this happens, the government may have to
raise interest rates to control inflation, but at the cost of slower economic growth.

Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of
economic weakness, the creditworthiness of the nation may be jeopardized. Thus, devaluation may
dampen investor confidence in the country's economy and hurt the country's ability to secure
foreign investment.

Another possible consequence is a round of successive devaluations. For instance, trading partners
may become concerned that a devaluation might negatively affect their own export industries.
Neighboring countries might devalue their own currencies to offset the effects of their trading
partner's devaluation. Such "beggar thy neighbor" policies tend to exacerbate economic difficulties
by creating instability in broader financial markets.

Since the 1930s, various international organizations such as the International Monetary Fund (IMF)
have been established to help nations coordinate their trade and foreign exchange policies and
thereby avoid successive rounds of devaluation and retaliation. 
Devaluation of the Rupee:

Introduction
Since its Independence in 1947, India has faced two major financial crises and two consequent
devaluations of the rupee. These crises were in 1966 and 1991 and, as we plan to show in this paper,
they had similar causes.

Foreign exchange reserves are an extremely critical aspect of any country’s ability to engage in

commerce with other countries. If a nation depletes its

foreign currency reserves and finds that its own currency is not accepted abroad, the only option left
to the country is to borrow from abroad. However, borrowing in foreign currency is built upon the
obligation of the borrowing nation to pay back the loan in the lender’s own currency or in some other
“hard” currency. If the debtor nation is not credit-worthy enough to borrow from a private bank or
from an institution such as the IMF, then the nation has no way of paying for imports and a financial
crisis accompanied by devaluation and capital flight results.

To prevent a financial crisis, a nation will typically adopt policies to maintain a stable
exchange rate to lessen exchange rate risk and increase international confidence and to safeguard its
foreign currency (or gold) reserves. The restrictions that a country will put in place come in two
forms: trade barriers and financial restrictions. Protectionist policies, particularly restrictions on
imports of goods and services, belong to the former category and restrictions on the flow of financial
assets or money across international borders

The 1966 Devaluation

As a developing economy, it is to be expected that India would import more than it exports. Despite
government attempts to obtain a positive trade balance, India has had consistent balance of payments
deficits since the 1950s. The 1966 devaluation was the result of the first major financial crisis the
government faced.  Furthermore, the Government of India had a budget deficit problem and could not borrow
money from abroad or from the private corporate sector, due to that sector’s negative savings rate. As a result,
the government issued bonds to the RBI, which increased the money supply, leading to inflation.

1991 Economic crisis

In 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a
basket of currencies of major trading partners. India started having balance of payments problems
since 1985, and by the end of 1990, it found itself in serious economic trouble. The government was
close to default and its foreign exchange reserves had dried up to the point that India could barely
finance three weeks’ worth of imports. As in 1966, India faced high inflation and large government
budget deficits. This led the government to devalue the rupee.

At the end of 1999, the Indian Rupee was devalued considerably.

Revaluation

In the period 2000–2007, the Rupee stopped declining and stabilized ranging between 1 USD = INR 44–48. In

recent times, the Indian Rupee had begun to gain value and by 2007 traded around 39 Rs to 1 US dollar , on

sustained foreign investment flows into the country . This posed problems for major exporters and BPO firms

located in the country. The trend has reversed lately with the 2008 financial crisis. The changes in the relative

value of the rupee has reflected that of most currencies, e.g. the British Pound, which had gained value against

the dollar and then has lost value again with the recession of 2008.