Contrary to the popular belief, appreciation in Rupee has a positive impact on real exports from India as it reduces the cost of importers inputs, finds Exim Bank
Chennai: Contrary to the popular belief, appreciation in Rupee has a positive impact on real exports from India as it reduces the cost of importers inputs, finds Exim Bank. This correlation is however influenced by sector-specific dynamics and hence policies and interventions have to be aligned to these nuances, it said.
The impact of currency movements on international trade is multi-faceted, and may differ across countries. A one per cent increase in real effective exchange rate of rupee will lead to long-term increase of 1.07 per cent in India’s exports. This finding indicates that a stronger rupee can be a powerful lever for improving India’s exports by reducing the cost of imported inputs.
The impact of volatility of rupee on India’s real exports also was found to have a positive impact in both short-run and long-run, though the magnitude of the impact remains low. This may be attributed to the higher risk premiums demanded by exporters in volatile environments.
India’s trade performance is highly influenced by sector-specific dynamics, shaped by currency fluctuations, global demand, and import intensity. In 62 trade intensive sectors such as electronics, chemicals, and petroleum product currency depreciation may increase export values but simultaneously raise import costs, thereby widening trade deficits.
In the trade intensive gems and jewellery sector, rupee appreciation has a positive impact on export performance, as cheaper imports of raw material can enable production of value-added exports more cost-effectively.
In domestically oriented sectors like food and agro-based products, with minimal import reliance, weaker rupee is correlated with improvements in both exports and trade balance. In transport equipment, weaker rupee is associated with a low correlation with improvement in exports but moderate correlation with worsening of trade balance.
On the contrary, the weak rupee has a moderate correlation with exports of metals and metal products, but a low correlation with trade balance in the sector. In the labour-intensive, export-oriented sectors of textiles and leather, a depreciating currency may lead to moderate negative impacts on trade balance in these sectors. However, there is also a moderate correlation of depreciation with increase in exports in case of leather.
“Aligning the policies and interventions to these nuances can support export growth and improve trade balance,” Exim Bank said. RBI had recently intervened in the rupee market to stop its fall against the US dollar.
