currency fluctuation and export performance
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8/3/2019 Currency Fluctuation and Export Performance
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Currency Fluctuation and Export Performance
What Really Matters
Global experience has shown that a fixed or rigid exchange rate will lead to
economic problems. In extreme cases, as has occurred in several Latin American
Countries, it may also have a disastrous impact. Especially in developing
economies, a fully flexible exchange rate governed wholly by market forces can
also lead to a financial crisis, Like the Asian Currency Crisis of the previous
decade.
The popular expert opinion recommends a managed float of the currency for
developing countries, that is , full convertibility of currency on the trade and
current account, but limited convertibility on the capital account, as is now
practiced by India.
The Reserve Bank of India (RBI) has been quite successful in managing the rupee
exchange rate even while progressively liberalizing it over the past 15 years. The
central bank has been allowing the market forces to determine the value of the
rupee and has intervened only to smoothen the fluctuations. The rupee witnessed asteady depreciation against the dollar until 2002, after which it moved to the Rs 43-
45/dollar band. Now the rupee is at a ten-year high.
Inflow of Forex
During this period, India also witnessed a large inflow of dollars on account ofincreasing exports, greater FDI and portfolio investments, and transfers. To stem
the appreciation of the rupee against the dollar, the RBI periodically bought dollar
from the open market and undertook sterilizing operations- that is, mopping up the
excess supply of rupees in the market by offloading government securities.
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This also resulted in burgeoning foreign exchange reserves. Inflationary pressures
were curbed by applying the brakes on Rupee appreciation. By and larghe,
infl;ation has been kept below 6% in the last six years.
Export Performance
Broadly the appreciation of the rupee against the dollar should boost exports by
making Indian products cheaper in the international market and, to an extent, curb
the growth in imports by making them costlier, though this adds to the inflationary
pressure on the economy.
A countrys export performance depends on a whole range of factors, of which the
exchange rate of the domestic currency is only one, especially in developing
economies. In India, the general perception is that it is quite a crucial factor.
Fact File
An analysis of the data of the last 10 years has shown that the
depreciation/appreciation of the rupee has had no major impact on the rate of
growth of exports.
In 1996-1997, while the rupee depreciation by 4.7% against the dollar, export
registered a growth of 5.3%in dollar terms. In 1997-1998, though the rupee
depreciated by 9.1%, the rate of growth of exports came down to 4.6%.
Again in 1998-1999, the rupee depreciation by 6.9%, but exports registered a
negative growth rate of 5.1%. While the rupee depreciation by 2.7% and 6.5% in
1999-2000and 2000-2001, exports grew by 10.9% and 21% respectively, exports
conversely registered high growth rates of 20.3% and 21.1% respectively.
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In 2004-2005, the rupee depreciated only by 0.8% and 1.9% respectively, but the
exports boomed with growth rates of 30.9% and 23%. In 2006-2007 the rupee
appreciated by 2.3%, but exports grew by 22.8%!
Though the above analysis is broad and lack rigour, what does it reveal? Simply,Indias exports have become increasingly Cost-Competitive and the rupee
depreciation and appreciation is not a major factor in determining the rate of export
growth.
Exporters Role
Although the rupee appreciation can lead to some erosion in export
competitiveness, only a sustained increase in the competitiveness of export items-and not the continuous fluctuation of the rupee-matters in the long run.
This does not mean that an effective exchange rate management strategy is not
required in the face of the continuing inflow of foreign exchange into India. There
is the inflation control objective too.
Significant credit is due to the exporting community, which has enhanced
productivity, improved quality, tightened delivery schedules, explored and entered
new markets, adopted aggressive marketing strategies, diversified exposure toother currencies, and taken recourse to suitable hedging instruments.
On the other side, transaction costs, though still high compared to global standards,
have come down, procedures have been significantly simplified, and duty
remission/neutralization schemes have become more focused.
If the government concentrates on providing a supportive infrastructure, timely
export credit at internationally competitive rates, and a conducive policy
framework that ensures simplified and transparent procedures, Indian exporters canbe top-performers.
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Questions:-
Q.1 do you really endorse the fact that export performance is danger due to rupee
appreciation?
Q.2 How does the RBI interview in extreme circumstances?
Q.3 What is the strategy of the trading community for withstanding such a
situation?
Q.4 Will India move the South East Asian way?
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