- Education And Career
- Companies & Markets
- Gadgets & Technology
- After Hours
- Banking & Finance
- Energy & Infra
- Case Study
- Web Exclusive
- Property Review
- Digital India
- Work Life Balance
- Test category by sumit
India's Exchange Rate Movements Have Limited Trade Effects
Even in a shrinking world market, depreciation in the rupee could still have resulted in India improving its exports
Photo Credit :
India's foreign trade has been shrinking for over one year, despite a depreciation in the exchange rate. In the April 2015-February 2016 period, exports have fallen by almost 17% on a year on year basis. But the Indian rupee has depreciated by almost 6.7% in mid-March 2016, compared to the same period last year as well.
So what explains the trend?
One explanation is that world trade itself is shrinking rapidly. Global goods' trade has reportedly dropped by 13.8% in US dollar terms in 2015 as per data from the Netherlands Bureau of Economic Policy Analysis. In a shrinking market, there are as many gains to be made. In the January-December 2015 period, India's exports, by comparison actually fell at a slightly slower rate.
All else equal, even in a shrinking world market, depreciation in the INR could still have resulted in India improving on its exports. All else, however, was far from equal. A comparison across major currencies reveals that India's currency depreciation against the dollar isn't nearly as much as that seen among other emerging market currencies.
Countries like Argentina, Brazil, South Africa, Turkey, Russia, among others, have seen double digit depreciation. In other words, while the INR has depreciated, it might not have any real trade effects if potential competitor countries' exchange rate has depreciated even more. In fact, it is in this scenario, a positive that India has been able to maintain its export share despite loss of competitiveness.
In this case, then, the question then becomes: why has India not seen a bigger drop in exports?
One reason for this can be the fact that the Indian rupee has depreciated far more dramatically against the euro and the Japanese yen over the past year, by 13% and 15% respectively, in comparison with the US dollar. Here too, other currencies like Brazilian real or Turkish lira have seen a large drop, but India's depreciation is fairly steep too. Further, the second can be, that all exports are not driven by just price competitiveness, which allows specific countries to specialise where they have a competitive advantage.
In more predictable times, the relationship between exchange rates and exports might be more straightforward, but in times like the current ones, there is clearly far more to account for.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.