Recent dip in rupee unlikely to add traction to exports, say experts

While the rating agency anticipates exports to reach $345 bn for FY19 this will still be at handshaking distance from the peak of $318 billion, recorded five years ago in FY14

Episodes of sharp dip of the Indian currency in a short period do not seem to add any traction to the level of exports from India. So the latest slide of the rupee could also end up the same way for exports. On Thursday, last week the rupee closed at 70.2 against the US dollar — its worst spell ever. The currency has slipped 9 per cent through 2018, from 63.67 at the beginning of the year.

Would it help this time? While most economists and export councils feel it would not, Sajjid Chinoy, chief India economist at JP Morgan, has a counter argument. “If domestic activity is languishing below potential, but external imbalances are unsustainable (because, say, exports are weak and imports are very strong) a real depreciation of the currency will help achieve both objectives,” he said.

His argument has support from the IMF too. Its standard prescription for the currency clearly says a dip helps. In a paper dating back to 2015, it had argued that a 10 per cent depreciation in a country’s exchange rate after netting out inflation has a 1.5 per cent positive impact on exports. The argument is that cheaper currencies make exports more attractive to foreign buyers.

At the same time in a sample check of monthly export trends for the last five years for India in episodes when the rupee took a toss against the US dollar, there was no buoyancy discernible in the data.

Ravi Sehgal, chairman of Engineering Exports Promotion Council of India, says the reason why a fall in rupee does not help is because it often happens for India when other emerging economies too see their currency dipping. “Further, our import intensity of exports is also increasing… the yo-yoing of the Indian rupee and this short run volatility further exacerbates the uncertainty for the exporters.”  

India Ratings in its latest report on the Indian economy that came out after the currency began its slide is similarly pessimistic. “India will face continued headwinds on the exports front,” its note says. While the rating agency anticipates exports to reach $345 billion for FY19 this will still be at handshaking distance from the peak of $318 billion, recorded five years ago in FY14.

Why is it so? According to NR Bhanumurthy, professor at NIPFP, a dip in India’s rupee against major currencies rate does not help. In a study, some time ago he finds a “negative relationship, which is unconventional”. In other words when the rupee tumbles, exports do too. His study found that “imports and the import tariffs are playing a major role in boosting exports growth in India, thus indicating room for import-led exports growth mechanism”.

The data in the table seems to bear out his hypothesis. In the periods of sharp drop in rupee against the dollar, recorded during the taper tantrum of 2013, in the winter of 2014 and in late 2016, exports did not rebound. Rather in 2017, when the rupee appreciated, India’s non-oil merchandise exports rose by 12 per cent clocking a six-year high.

Bhanumurthy says weakness in exports are often because of trade policies and low productivity levels in the manufacturing sector that hurts competitiveness. “Hence, it is necessary to understand the behaviour of exports, while manipulating the exchange rates through intervention.”

Chinoy agrees that India’s import content in exports has risen, which makes currency depreciation a two-way street. But he argues there is still juice that can be extracted when the rupee heads southwards. “Quarterly data from 2004 to 2017, reveals that every 1 per cent change of India’s 36-country REER (real effective exchange rate) impacts non-oil exports by 1.4 per cent in the long run…” But any rupee depreciation, he argues, “in the current global environment, needs to be calibrated and gradual, through the use of forex reserves to ensure currency expectations don’t get unhinged and result in a self-fulfilling spiral as in 2013”.