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Sunday, May 02, 2010

The bogey of exports growth

There is a lot of talk about rupee appreciation in recent weeks. It is claimed that rupee appreciation is bad for exports growth and that RBI must trade in the rupee-dollar market so as to force the exchange rate back to (say) Rs.50 a dollar. I wrote a piece in Financial Express yesterday, about the real effective exchange rate, exports growth, and the Chinese exports miracle.


  1. Not completely off-topic but...

    "To achieve the same rate of growth of GDP as China India would have to increase the rate of growth of capital inputs and therefore of the level of investment in the economy. Strategies which rely on India achieving the same rate of GDP growth as China without increasing its level of investment are statistically unrealistic."

    The author bases this on an analysis of Total Factor Productivity and Incremental Capital Output Ratio. I was wondering what your thoughts would be on this.

  2. This comment has been removed by the author.

  3. Might seem a basic question, but is there evidence to suggest that nominal exchange rate does not influence export competitiveness?

    a few days back I read an article in mint on why REER should be considered as the actual exchange rate, however there is no political will towards that ... i am sorry i cant find the link .. would paste here as soon as I am able to locate it


  4. Hi Ajay,

    With this entire yuan re-val issue, I ran some REER charts on all asian countries and was actually surpirsed to see the result.

    Barring, i guess Malaysia, no other country came even close to the extent of chinese appreciation on a REER basis

    you are right, it does throw the china manipulator issue fall flat -

    on a REER basis, indian exports seem very competitive - maybe that explains the export growth..

  5. Mr. Shah,
    depreciation or appreciation aside, the stability of the rupee is should be a genuine concern.

    Growth, inflation, and currency pegs are competing forces which cannot all be controlled. However, managing all three can mitigate the volatility in any one.

    The argument of reduced input costs due to rupee appreciation applies for the country in general, but not for industries in specific. Infosys gains little from cheaper oil.

    I believe for any company/industry in India, stability is paramount for providing revenue projections as well as costs.


  6. Hi Ajay,

    I just want to point out some issues, please correct my understanding on following -

    1. If we assume that RBI should not concern itself with subsidizing exporters, then can we say with equal strength that RBI does not use currency appreciation to control inflation ( at least to some degree )?

    2. An exporter earning in $, is subjected to dollar rupee exchange rate and not necessarily REER, so how can we establish a relation between specific currency volatility and REER's relative stability and exporter's increase cost of hedging and increased risk in cashflows.

    3. Is it possible to establish a direct relationship between REER and export groth based on figure 1 without testing seasonality of both thime series. Based on fig 1 we can also no comment how the export growth relates to volatility in REER.


  7. Mr. Patel,

    We used to have administered prices for steel and cement. It gave stability to the private business and dumped the problems on the government (and the average citizen).

    Now the price of steel fluctuates every day. The private sector has learned how to deal with this risk - as the private sector in any good country does.

    Same is the case with the currency - it's a risk that the private sector should bear, fair and square. It is not something that the private sector should demand is done by the government. And in this case, unlike steel or cement, there is a nice mechanism available through which this risk can be managed.

  8. Neeraj,

    I am not religious about exchange rate intervention by a central bank. There are small open economies where the financial system is weak where trading on the currency market is a useful mechanism for achieving low and stable prices. So as long as the central bank is primarily focused on inflation, a variety of methods might be useful to get there.

    Exporters don't care about REER - they care about profit. The job of the exporter is to work out his calculations about risk exposure. One big thing to be careful about is the exchange rate embedded in many input prices and many output prices. The footprint of the exchange rate extends to the entire tradeables sector. But now there is a great way to manage this risk. So it is now possible to measure comprehensive economic exposure and manage it.

    We have done some work on modelling exports growth and here's the quick summary. The big factor which matters is world trade growth. E.g. in the Indian graph you see a clear dip when world trade did badly. Once that is taken into account, REER fluctuations do little, which is what my graphs are heuristically saying.

  9. Confused on a couple of points:

    First, couldn't the export growth be due to the comparative undervaluation to China on a REER basis?

    Second, I'm not sure what REER suggests in terms of absolute level of undervaluation. Hypothetically, if the currency is 25% undervalued but varies in a 5% up/down range shouldn't that merely change the rate of export growth (and the absolute undervaluation ensures absolute export growth?).

  10. I seem to have forgotten to post the link earlier:

    Apologies if this is an intrusion.

  11. As the rupee is going stringer and dollar getting weak so i think Indian export industry getting problem so there should be some interruption by RBI.

  12. I think India should take major step regarding the exporter of India.To manage the dollar value.


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