Explanation:

Depreciation of value of a currency, due to market forces of demand and supply does not result into increase in trade deficit. Trade deficit is a situation when imports exceed exports. When the local currency depreciates, imports become more expensive, so locals often buy fewer imported goods. On the other hand, exported goods cost less to international buyers, so their demand tends to grow. Fewer imports and more exports will reduce the trade deficit and could lead to surplus.

A devaluation leads to a decline in the value of a currency making exports more competitive and imports more expensive. Generally, a devaluation is likely to contribute to inflationary pressures because of higher import prices and rising demand for exports. However, the overall impact depends on the state of the economy and other factors affecting inflation. In theory, a devaluation could cause inflation for three reasons:

• Cost-push inflation
• Demand-pull inflation
• Fewer incentives in long-term to cut cost

Depreciation of a currency helps in inward remittances. For example, in India, where remittances are one of the significant contributors to the foreign exchange reserve and makes up nearly 25 percent of total foreign exchange reserves in the country, the depreciation of the Indian rupee always has a positive impact on the remittances. The country has witnessed 50 to 80 percent growth in remittance activity from several nations, particularly the Gulf areas, during the recent months. A similar trend occurred in 2012, 2013 and 2014 when the rupee witnessed a sustained depreciation.