currency fluctuation and export performance

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?

currency fluctuation and export performance

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