Exports fall when rupee depreciates, finds survey

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SME Times News Bureau | 15 Jun, 2013
Amidst the uncertain global economic milieu and the volatility in rupee exchange rate scenario, majority of the exporters feel that it has posted upside risks in their business scenario, according to a survey of 124 exporters across small, medium & large enterprises undertaken by PHD Research Bureau of the PHD Chamber of Commerce & Industry.

"It has been found that India's exports grew robust in the rupee appreciation years and decline during the rupee depreciation years. Within the span of the last 10 years, the rupee depreciated significantly against the dollar whereas, during 2008-09 as compared to 2007-08, and the exports growth decelerated sharply from around 29 percent to 14 percent respectively," the survey said.

"Country's exports declines significantly in depreciating rupee scenario, which is evident from the recent trend when rupee depreciated from around Rs48/USD in 2011-12 to around Rs.54/USD in 2012-13, exports growth fell sharply from around 22 percent to about (-)2 percent respectively," it added.

Subsequently, during the Post Lehman crisis period, during 2009-10, when rupee further depreciated, exports growth slipped to as low as (-)3.5 percent. When rupee depreciated from around Rs46/ USD in 2010-11 to about Rs48/USD in 2011-12, exports growth slowed down considerably from around 41 percent to about 22 percent respectively.

According to the survey, a large proportion of the respondents were of the view that higher growth of exports is crucial for improving the trade deficit and hence an effective exchange rate management strategy may prove to be the best course of action for now.

It has been observed that weak rupee may not buy trade in terms of exports growth and improving trade balances. The weak rupee performance vis-à-vis export behavior varies during the good and the bad years. It is in fact the global demand conditions which ultimately impacts the exports scenario from the country, said the survey.

The majority of respondents (72 percent) were of the view that variables, such as competitiveness, policy, incentives structure and world economic growth have a predominant influence other than exchange rate in influencing India's exports, however, remaining 28 percent of the respondents felt that there is always a direct correspondence between the external value of the rupee and the country's trade performance.

According to the survey, exporters felt that exchange rate responds to many factors including the flow of imports and exports, the flow of capital, relative inflation rates, etc.

The sharp fall in value of rupee can be attributed to both global and domestic factors. Strengthening of US dollar in the international market and deleveraging due to the euro area crisis have impacted financial markets across emerging economies, said the survey. Apart from the global factors, there were several domestic factors that have added to the weakening trend of the rupee, which include increasing current account deficit and lack of economic reforms in the various segments.

Exports and Imports growth vis-à-vis exchange rate scenario
Year	Exchange rate of Rupee against USD	Exports growth	Imports growth	Balance of trade(US$Bn)
2000-01	45.68	20.05	0.48	(-)5.90
2001-02	47.69	(-)0.56	2.88	(-)7.59
2002-03	48.39	20.29	19.45	(-)8.69
2003-04	45.95	21.1	27.25	(-)14.31
2004-05	44.93	30.85	42.7	(-)27.98
2005-06	44.27	23.41	33.76	(-)46.08
2006-07	45.28	22.62	24.52	(-)59.32
2007-08	40.24	29.05	35.49	(-)88.52
2008-09	45.92	13.59	20.68	(-)118.40
2009-10	47.42	(-)3.53	(-)5.05	(-)109.62
2010-11	45.58	40.49	28.23	(-)118.63
2011-12	47.92	21.83	32.33	(-)183.36
2012-13	54.4	(-)1.86	0.54	(-)191.67
Source: PHD Research Bureau, compiled from Ministry of Commerce & Industry and RBI

The trade deficit of India has been increasing over the last decade from around USD 6bn in 2000-01 to around USD 192 bn in 2012-13. In case of this also, a similar trend was observed wherein, the widening of trade deficits was found to be dependant on overall global demand and not exchange rate of rupee. It is clear from the fact that when the rupee appreciated during 2006-07, the trade deficit was at a moderate level of around USD 59 bn.

However, when the rupee met with significant depreciation during the Lehman crisis year 2008-09, the trade deficit entered into the higher trajectory of around USD 118 bn. Thus, weak rupee may or may not help to improve the trade balance. It is largely dependant on the global economic conditions and overall demand situation, observed the survey.

According to the survey, almost all respondents felt that the broad objective must be to ensure that the external value of the rupee is realistic and stable. Majority of the respondents (90 percent) felt that credit policy must be further reduced by 50 basis points in the month of June as RBI releases its mid quarter review of monetary policy 2013-14 as it influences exporters in attracting loan at cheaper interest rates and would aid them in mitigating the fluctuations of volatile rupee exchange rate scenario.

A large portion of exporters reported that the Government of India comes up with quick and drastic changes in foreign trade policy, which keeps the exporters perplexed, as they have to redo their whole financial calculations. Based on current policy measures, the exporter makes his strategy for selling in the international market, taking into account his profit margin. A sudden change of policy leaves them shaken affecting their selling strategy, said the survey.