reading comprehension Model Questions & Answers, Practice Test for ibps clerk mains

Directions:

Read the passage carefully and answer the questions given below it.

Currency devaluation takes place when one country's currency is reduced in value in comparison to other currencies. After currency devaluation, more of the devalued currency is required in order to purchase the same amount of other currencies. Afictional example: If last year, one US Dollar purchased 50 Indian Rupees, and this year, one US Dollar can only purchase 45 Indian Rupees, the US dollar has undergone a currency devaluation.

Currency devaluation can take two forms. It can either be the natural result of market forces, or it can be the result of government intervention. In the first scenario, the global market changes its opinion about the stability, value or future of a currency and decides that it is willing to pay less. In the second scenario, a nation's government fixes the relative price of their currency below its present level and prohibits currency exchange at any other rate.

Currency devaluation can help achieve a more desirable balance of trade. For nations experiencing a trade deficit (when imports exceed exports) , a currency devaluation will reduce the price of their products abroad and increase the price of foreign products in domestic markets. Increased demand for products in other countries due to lower prices can also mean more jobs and lower unemployment rates at home.

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 l991 and they had similar causes.

The 1966 devaluation was the result of the first major financial crisis the government faced. Since 1950, India ran continued trade deficits that increased in magnitude in the 1960s. Two additional factors played a role in the 1966 devaluation. The first was India's war with Pakistan in late 1965. The second factor is the drought of 1965/1966. The sharp rise in prices in this period, which led to devaluation, is often blamed on the drought, but in 1964/1965 there was a record harvest and still, prices rose by 10%. The drought was a catalyst for, rather than a direct cause of, devaluation.

Following the 1966 devaluation, the government initially liberalized its trade restrictions by reducing export subsidization and import tariffs. These actions counteracted the devaluation to some extent but even taking these policies into consideration, there was still a net devaluation. 1991 is often cited as the year of economic reform in India. Surely, the government's economic policies changed drastically in that year, but the 1991 liberalisation was an extension of earlier, albeit slower, reform efforts that had begun in the 1970s when India relaxed restrictions on imported capital goods as part of its industrialization plan.

While the devaluation of 1991 was economically necessary to avert a financial crisis, the radical changes in India's economic policies were, to some extent, undertaken voluntarily by the government of PVNarasimha Rao. In July of 1991 the Indian government devalued the rupee by between 18 and 19 per cent.