Posted in Finance, Accounting and Economics Terms, Total Reads: 591
The event in which the country’s currency gets revalued to bring down existing excessive inflation is known as redenomination. It also signifies the event in which the face value of banknotes and coins are changed. In our recent financial history many nation had their currency revaluated. One major feature in redenomination remains that the face value of currency changes but the foreign exchange rate remains the same.
The government is forced to do so in situation where the existing currency is not worth much and so multiples of the same currency like 10,100, 1000 comes into money circulation. China, Russia, Israel, France, Argentina, Brazil, Peru, Bolivia are some of the countries which have gone through currency redenomination.
For eg, if a pound of bread cost Rs10 today and redenomination occurs (considering other factors not changing) this same bread would then cost Rs 1 in the new currency(assuming the ratio being 10:1). Some downside of currency denomination are hyperinflation follows gradually after such event. Taking our former example, as the price of bread in new currency form is Rs 1 so people will not mind this if it increases to Rs 2. But in actual such an increase would mean that there is an inflation of 50%. Similar scenario across many product will take place and will result in huge disorientation in people. Suppliers taking advantage of such situation will increase prices and take advantage of such disoriented people.