Export and Exchange Rate

Export and Exchange Rate

By Rajiv Kumar and Geetima Das Krishna
1 April 2015

“A key macro-economic variable critical to competitiveness and prospects for export growth is the exchange rate…..If the nominal exchange rate stays steady and the rate of inflation in India is higher than that in the rest of the world (as has been the case for the last decade) the real exchange rate appreciates. The competitiveness of exports is eroded by the effective exchange rate appreciation of the rupee” – Foreign Trade Policy (FTP for 2015-20, page 12).
The Rupee has appreciated more than 20% in nominal terms against the euro in fiscal 2015 (April 2014 – March 2015). The trade weighted 6-currency REER has risen from 109.58 in February 2014 to an all-time-high of 124.34 in February 2015. High REER indicates that the inflation adjusted Rupee has become stronger against almost all major currencies, except the US dollar India’s exports has weakened in recent months, declining 15% yoy in February, 2015 - third successive month of contraction. There are concerns that strengthening of Rupee will lead to loss of competitiveness for India's exports that will hurt ‘Make-InIndia’ initiative that aims to put India on the world map as a manufacturing hub. The Finance Minister Arun Jaitley also weighed in recently when he said that the government would like the rupee to reflect its real value. Therefore, we decided to look at the impact of exchange rate on exports, particularly manufacturing exports.