US Fed rate hike: Indian exports may take small hit in long-term

While high global demand may sustain export growth, continued investments into India can make trade uncompetitive

India’s export earnings are expected to remain stable or at the most take a small hit in the wake of the US Federal Reserve raising interest rates.

Experts and exporters alike say this will happen as global demand continues to remain high, thereby cementing the rise of exports.  However, at the same time, India continues to attract global investments, thereby strengthening the Indian rupee, which may lead to exports becoming more expensive and thereby less competitive in the global market.

Hopes on high demand

The US Fed on Wednesday raised interest rates by 0.25 per cent, the sixth time since December 2015. Even as fourth quarter gross domestic product (GDP) growth in the US  was revised downwards to 2.5 per cent, US policymakers now believe that economic growth will remain steady in 2018. As a result, the Fed has raised its forecast for 2018 GDP growth from the earlier 2.5 per cent to 2.7 per cent and increased the 2019 expectation from 2.1 per cent to 2.4 per cent.

The World Trade Organization last month said that the trade recovery of 2017 should continue, with solid trade volume growth in the first quarter of 2018. Merchandise trade volume is expected to see 3.6 per cent rise in 2017 and 3.2 per cent in 2018, it said. “Exports depend more on global demand than the currency rate and demand is broadly expected to remain stable and rising over the next one year,” Devendra Pant, chief economist at India Ratings and Research, said. 

Even then, the rupee has remained relatively stable over the past one year even as India’s exports have grown, he added.

Rupee beats trends

While a Fed rate hike is generally expected to strengthen the US dollar as investors pull up investments from foreign markets and deposit it with the US, thereby weakening other currencies such as the Indian rupee in comparison, this time the opposite has happened.

The Indian rupee on Thursday strengthened against US dollar. The rupee ended at 65.11 a dollar, up 0.15 per cent from its Wednesday’s close of 65.21. “We have to see how foreign institutional investors behave over the next couple of months, but overall investors continue to pump in money into the Indian economy,” Ajay Sahai, director general  of the Federation of Indian Export Organisations, said.

This is expected to make outbound trade more expensive and add to India’s woes of uncompetitive exports. “Apart from the rupee and the Chinese yuan, most other currencies of Asian competitor nations have depreciated and are expected to continue doing so,” Sahai added.

This may have started to become visible in the data as India’s exports growth continued to slacken for the third straight month in February, with outbound shipments rising at 4.48 per cent, effectively half of January’s 9.07 per cent growth rate. The growth rate has dipped from November’s high 30.5 per cent.

The government blamed this on contraction in major exchange earning sectors such as textiles and engineering goods.

February exports stood at $25.83 billion, taking the total export tally in the current financial year to $273.73 billion. As a result, the last month of the financial year would have to see at least $27 billion worth of exports for the country to hit the government’s target of $300 billion worth of outbound trade. 

“While I believe that the target would be reached, we need to have a target of at least $345-350 billion for the next financial year,” Sahai added.