Is the rising rupee ruining India’s exports?


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Is the rising rupee ruining India’s exports?
09 December 2017
Author: Pravakar Sahoo, Institute of Economic Growth, Delhi University

Export-led growth accompanied by liberalisation and an open economy results in sustained productivity-led growth. One of the brightest examples of this is China, who was greatly helped by the renminbi’s under-valued exchange rate. China’s share of world exports increased from 1 per cent in 1980 to around 14 per cent in 2016–17. So what will the recent appreciation of the Indian rupee mean for the competitiveness of its exports in world markets?

Using 2004–05 as a base year, both real and nominal exchange rates show an appreciation of the rupee since May 2016. And according to a weighted real exchange rate against India’s major trading partners, the rupee has been above its 2004–05 value for multiple consecutive years. These trends indicate that the rupee is overvalued.

In contrast, most major exporters such as China, Japan, the United Kingdom, South Korea, Brazil and the Philippines have actually experienced a fall in real exchange rates since 2013. India is the only country that has had a consistent increase in its exchange rate over the past few years. For example, the rupee’s real exchange rate against the renminbi, the Philippine peso and the US dollar fell from 124.4 to 119, 113.3 to 107 and 114.5 to 112 respectively from 2016–2017.

India’s tight monetary policy — along with a positive outlook for the Indian economy — has resulted in huge capital inflows (mostly short term), which have played a major role in strengthening the rupee. The Reserve Bank of India’s (RBI’s) lack of intervention and the government’s indirect support for a strong currency has created expectations around rupee appreciation that encourage capital inflows — particularly into the equity market where any appreciation of the rupee would also result in higher returns on investment.

But since the real exchange rate has consistently been higher than its base year levels and is rising, India has a case of exchange rate misalignment. This is affecting India’s exports and has the potential to create economic volatility. One of the lessons from the Asian financial crisis is that persistent overvaluation of a currency leads to crisis. By contrast, a well-managed and undervalued currency regime with appropriate reforms could be hugely beneficial — as China has demonstrated.

In the present context, real exchange rate appreciation would not be good for Indian industry. It would lead to reduced competitiveness in exports and tradable sectors, especially since industries are currently suffering from overcapacity. But India’s high fiscal deficit and high debt-to-GDP ratio gives the RBI little space to intervene in the foreign exchange market, as letting the rupee depreciate could lead to higher inflation. Hence the RBI’s reticence: inflation remains a politically sensitive subject in India, and the RBI has been using exchange rate mechanisms to achieve its inflation target.

The strengthening rupee is hurting exporters in both competitiveness and earnings. There are many labour-intensive and export-dependent industries and the supply chain of export industries involves millions of small and medium-sized enterprises (SMEs). A rising rupee is therefore not good for employment.
A high rupee also hurts the services sector — particularly for those whose export earnings are foreign-currency dominated. Software exports are experiencing lower profit margins, and intense competition in the world market does not allow them to raise prices. Indeed, corporate earnings of many US dollar-denominated industries are experiencing low market earnings.

The rising rupee is not all bad. It has helped contain inflation through cheap imports and has also helped companies with foreign currency-denominated debt. But the strategy may not be right to sustain growth in the long run. In the medium to long term, cheap imports will affect domestic production and jobs, particularly in manufacturing. Moreover, India’s consumer price index inflation is based more on a non-tradable basket and is influenced more by supply-side bottlenecks. Hence, allowing the rupee to depreciate may not particularly affect inflation provided that the economy pursues structural reforms across sectors to improve productivity-led growth.

It is time to correct the misalignment in India’s exchange rates and to allow the rupee to move towards its true value. The overvalued rupee is hurting Indian exports, investment and large numbers of export-based SMEs. Further, India’s overvalued currency is susceptible to volatility and any rise in the US interest rate could lead to a run on the rupee. At the end of the day, the Indian economy needs to be efficient, expanding and creating jobs — an over-valued rupee undermines these goals.

Pravakar Sahoo is a Professor at the Institute of Economic Growth, Delhi University.

An earlier and longer version of this article was first published in Business Standard.


Nov 19, 2017
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Nice article but a bit self contradictory only focus on export...Appreciation or devaluation of currency in a free market is affected by the economics fundamental..It would have been much better had author presented it with some figures or impacts on overall economy..

1) India is import oriented (materially) ...Its imports bill has been exceeding its export earnings by anywhere between $100 billion and $130 billion in recent 5 to 10 years..Strong Rupee to dollar exchange rate can help the country having net saving in this regards..India imports bill for FY 2017 was approximately USD 371 billion with average exchange rate around 68 USD...So just a decrease from 68 to 60 could save around 3,000 billion in rupee ..

2) India major import is Oil and related items so the import will not be affected by Currency rather by economic activity and internal demand....India exports from last sep on y to y basis has been increased by 25% with a record high in past 5 years whereas the rupee continue to be stronger/appreciated..This shows the inverse relationship is not that much strong in India case

3) It would have been much better had the author pointed out the correlation between Export and Currency appreciation w.r.t indian economy..

4) Debt servicing become cheaper and liability are reduced with strong currency appreciation..India with external debt of almost USD 380 billion will get a quite relieve in this regard

5) Again its not black and white , while it will defiantly have some impact on exporter but how much ?..One need to calculate the proper P &L account before simply declaring it bad or good..Its impact also changed from country to country..

5) Foreign investors like to have stable currency..A nation needs to have a relatively stable currency to attract investment capital from foreign investors. Otherwise, the prospect of exchange losses inflicted may deter overseas investors.This can clearly be visible in India case..

6) So in all in all we have to seen how much its affects this
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Nov 21, 2017
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By contrast, a well-managed and undervalued currency regime with appropriate reforms could be hugely beneficial — as China has demonstrated.

Too much fictitious economy, assumptions, numbers and suppositions have always made me uneasy. However, here is what I think of INR appreciation

The comparison with China is not appropriate because of many factors, the key being difference in governance systems, policies (how strictly those policies could be implemented) and visions of the two countries. Not every country can send its inmates to do their work in a foreign country to save costs.

The volume of exports matters (vs imports) ....... your exports would be costlier and imports would be cheaper if the currency appreciates, unless you have a monopoly or you produce different quality versions of the same product, you should expect to face a fall in exports .... this loss has to be outmatched by gains made in imports. Indian exports compared to China are more of an agriculture nature, wherein again it is not performing as it should have been ....... China thoroughly enjoys dumping of low quality goods taking benefit of the relaxed regulations of some of countries. The MNCs in India that export and bring in receipts won't be happy about the INR appreciation.

The human factor ........ lesser earnings for families of overseas Indian (NRI) manpower. If their buying power has reduced they won't be happy. And India has pretty significant overseas manpower.

The positive thing as H!tch mentioned savings on debt repayments and debt volumes.

But again its all fictitious ........ bring back the Kohi Noor.


Dec 18, 2017
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Good analysis so far.

I will add that appreciation/depreciation is really an averaged out figure that has good/bad that is really dependent on how far you want to go into the resolution.

I say this because exports/import volumes/values per se is one thing, but what is socio-economically more important is the price elasticity + employment elasticity + capital elasticity of the sectors (trade + investment exposure related ones) and their feedback loops to rest of the (non foreign exposed) economy.

For example say if INR appreciates considerably for argument sake from 65 per dollar to 30 per dollar (just to make the effect appreciable) over say a year or two years etc (short enough time for impact).

We first have to look into WHY that appreciation is happening at that rate. Obviously there is a massive demand for INR being generated compared to USD. Now if that demand is because of Indian exports (across the board) becoming massively competitive compared to before in first place (the China phenomenon from late 80s to end 90s) then there is no real question of exports being ruined...because EVERYTHING is becoming more competitive (be it capital or employment intensive). Similary this will finance more easily any kind of import you are doing/want to do or you can simply use the buffer afforded to increase forex (helpful to dampen the demand forces for your liquidity).

But if the appreciation (demand of INR) is not really export related, or more specific export related (say only part of exports is really becoming competitive/ in demand), things become more complicated. Is the demand for say capital intensive output in India outpricing the employment driven ones (as they relate to exports)? Say a big, growing market wants to buy more and more Indian refined oil from Jamnagar et al, so INR appreciates, that could be pretty bad for other Indian exports as they become more expensive. This happened with the Dutch post WW2 when they found gas in the north sea close to much so that its known as "dutch effect" (though in their case it was exacerbated by massive ramped commited increase in social spending allocation internally and caused a relative recession for a good number of years till other export sectors could catch up and stabilise).

This same thing (specific demand pull of INR in forex market caused by some esp capital intensive sectors only) relates in a parallel way to higher foreign investment too (because remember FDI has to be converted into INR for local use/deployment and is a transient "over"-supply of foreign USD etc). Again whether the appreciation resulting from that depends on what is being invested into (direct jobs or simply capital relying on trickle down of various Mx velocities) to know if the appreciation is "worth it". It will be worth it from the import end (be it goods ,services or loan repayments in foreign currency) of BoP generally but again it depends on the precise composition and elasticities of these imports to India's economic structure (real, future and ideal etc)....are they imports that will fuel jobs/production or simply finance jobs/production elsewhere long term?

A very complicated analysis to do, with much data churning. I do not envy NITI aayog's job....but policy changes should be determined by such analysis.

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