Sensitivity of India's merchandise exports to real exchange rate changes seems to have come down over years

RBI stated yesterday that IMFs recent research paper on forex market intervention (FXI) concludes that the RBI has been intervening to cushion the impact of external shocks, smooth market volatility, preclude the emergence of disorderly market conditions, and opportunistically replenish its FX reserves. It is worth noting that the INR depreciated by 7.8 per cent during 2022-23 and by 1.4 per cent for 2023-24. The INRs lower order of depreciation in 2023-24 reflected the strengthening of Indias macro-fundamentals. The sensitivity of Indias merchandise exports to real exchange rate changes seems to have come down over the years, reflecting diversification across markets and export items, rising technology intensity and higher value addition in manufacturing exports, increasing participation in global supply chains, and improving productivity and competitiveness. RBI noted that the emphasis in Indias export effort is shifting towards expanding market share on the basis of improvements in quality and cutting edge technology without the need for artificial props such as from an undervalued exchange rate.

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