Revaluation

Rakesh Kumar

08 Sep, 2023

Revaluation refers to the government or central bank’s deliberate increase in the value of a country’s currency relative to other currencies, often to boost trade and control inflation. This is done under a fixed exchange rate system and is the opposite of devaluation, where the value of the currency is decreased to promote exports. Revaluation can also pertain to an upward adjustment in the value of goods or products. It is distinct from appreciation, which is a market-driven increase in currency value, and redenomination, which alters a currency’s face value without affecting its purchasing power. Revaluations can influence the financial markets and the valuation of properties in the affected country.

What is Revaluation?

• Revaluation comes within foreign exchange prospects. It’s meant to value currency. If there is any rise within the domestic value of any currency with the intervention of the government or the central bank on their behalf, it will be a Revaluation.
• An upward adjustment or change in any goods, product or currency itself will be known as Revaluation when the government decides that there will be an official hike in the domestic currency of any country in relation to other foreign countries under a fixed exchange rate system.
• While Devaluation is just the opposite of Revaluation, when the currency of any country decreases or loses its value with respect to the foreign countries’ currencies and the government makes a decision by lowering the fixed exchange rate value, then it will be classified under Devaluation.  
• In both Revaluation and Devaluation, the government deliberately decides to increase or decrease their domestic currency value to promote export and trade. Market forces in terms of demand and supply are not responsible for this.
• In a broader sense, simply giving value to any currency is Revaluation and substituting its value at the international level by lowering the fixed exchange rate is Devaluation. Suppose a rise in a currency within floating or fluctuating exchange rates where the market forces are responsible is an appreciation, while changing or altering the face of any currency without disturbing its purchasing capacity is a Redenomination.
• Currency revaluation can be seen on a regular basis on the basis of some important fluctuations with the foreign currency within the market along with other related stock exchanges. It can also affect the value of any property within any country where currency revaluation occurred.

Key Points on Revaluation

An upward hike in any country’s currency exchange from the bottom of its own standardized value is a revaluation. Likewise, hike in gold rates, labour wage, etc.

In countries where a fixed exchange rate is followed, only the government can make changes according to the currency’s value. The government refers to the country’s central bank. 

Revaluation possibilities in floating exchange systems can be done by different events, such as changing interest rates among nations or any vast event that directly affects the country’s economy.

Understanding Revaluation Concept

• When a country’s currency is officially appreciated in relation to other foreign countries under a fixed exchange rate system, at the same time, the Revaluation is just the opposite of the devaluation. When the currency of any country loses its value with respect to foreign countries, it will be classified under Devaluation.
• Revaluation and, opposite, devaluation are possible only by the intervention of government authority in lowering or increasing the value of their domestic currency within the country by lowering the fixed exchange rate.
• Appreciation and Depreciation are similar to Revaluation and Devaluation. Suppose in any country, the domestic value of their currency gets low or high because of the market forces under a fluctuating or floating exchange rate. This will be termed Appreciation(rise in domestic currency value) and Depreciation (decrease in currency value). There will be no applicability of government or central bank in lowering or raising the currency.
• Currency revaluation can be seen on a regular basis on the basis of some important fluctuations with the foreign currency within the market along with other related stock exchanges. It can also affect the value of any property within any country where currency revaluation occurred.

Fixed Exchange Rate

The fixed exchange rate can be known when the government itself decides that the price or value will be of any currency in deciding with respect to some other currency in the exchange process. The government decides the fixed rate of exchange, and no market forces, including demand and supply, play any role in deciding the currency rate fix rate. 

Implications of Revaluation & Devaluation

There will be an excess demand for foreign currency in the international market in the case of Revaluation, and then the Reserve Bank of India, in order to fulfil the excess demand for foreign currency, releases their forex exchange reserve. Reserve bank performs its functions as a custodian of foreign exchange and releases it accordingly. But in the case of Devaluation where the demand and supply are low, the Reserve Bank itself collect or stores the forex. Forex is comprised of two words: foreign and exchange.

Impact of Revaluation in Market

Suppose the cost of 1$ is 60Rs. In the Indian market, the government of India has evaluated the value of the domestic currency. Now, the value of the Indian rupee with respect to the USA dollar has increased to Rs. 70.

Then, a person living in the USA importing any product from India needs to pay more money, and the same import was done by paying less amount to Indian businessman previously. Now, the importers in the USA will look out for an alternate country rather than India just because the import has become costly with India. Sometimes, currency revaluation does not favour the Indian exporters because they will be unable to sell more goods and make profits, resulting in exports of less quantity and loss in revenue.

The same thing applies to the devaluation case; when there is a decrease in the value of domestic currency in India, then the imports living in foreign like the USA, etc., will import more and more goods from our country because the imports have become so cheaper with India and they will not look for another alternative. Indian exporters can easily sell more goods and earn more profits. So somehow, sometimes, Devaluations favour Indian exporters.

Why a Country Increase Its Domestic Value of Currency?

Various factors are solely responsible for the increase of any country’s domestic currency. Market forces like demands and supply play a vital role within the floating rate of exchange, but in the case of a fixed rate of exchange, generally, a country or its central bank re-values or devalues its currencies in order to promote imports and exports. Any country’s central bank used to sell out or release their foreign exchange or forex at the time of Revaluation of currency. In contrast, the reserve bank of any currency store or collects other forex at the time of Devaluation, Etc.