Abstract
Exchange rates and exports have always been discussed in tandem. Whenever Rupee depreciates, Government become alert as any strengthening of rupee makes the exports costly because of which they loose their competitiveness. Reason given is that this has an adverse affect on the country’s Balance of Payments Surplus and it pulls down the economic growth. Lobby of the exporters also stands up and tries to make its voice heard in the corridors of the Union Government. Hence, this paper has been written with the objective of finding whether there is any relationship between the growth in exports and the depreciating Rupee.
Introduction
In last few days, several articles have been written about the appreciation of Rupee and its effect on the competitiveness of the Indian exports.
This is due to the RBI’s policy of letting Rupee to rise in order to tame the inflation. Till now, whenever Rupee appreciated, RBI intervened by buying the dollars from the market and releasing the equivalent amount of Rupee in the economy which increased the money supply. An increase in the money supply to a particular extent is fine but subsequently it leads to inflation – too much money chasing too few goods. With Indian economy already having a high level of inflation due to supply side constraints, any attempt by the RBI to stem the appreciation of Rupee would have increased the supply of money and hence inflation. That is why; RBI stopped buying dollars which caused appreciation in Rupee.
People have differing views about RBI’s policy. One view is that on account of the appreciating Rupee, our exports will loose their sheen and the trade deficit will increase. Another view is that the appreciating rupee is an indicator of the strong growth of our economy, which has resulted in higher FDI and FII inflows, and there is no harm in what RBI is doing currently. Exporters need to pull on their socks and focus more on cost reduction and quality improvement. In the long run, it is the competitiveness that matters and not the depreciation in Rupee.
Overview
If we observe the trend of Indian exports, India has exported goods and services worth $ 125 bn in the financial year 2006-07 which was just $ 2 bn in 1970-71. Thus exports have grown at a Compounded Annual Growth Rate of approx. 12% p.a. Currently the share of India in the World trade is about 1.5% which is expected to cross 2% in 2009. Similarly, the average exchange rate was Rs. 7.56 per USD in the year 1970-71 which has increased to Rs. 45.25 per USD in 2006-07. The lowest level which the Rupee had touched was in 2002-03 when the average exchange rate was Rs. 48.40 per USD.
Exchange rates and exports have always been discussed in tandem. Whenever Rupee depreciates, Government become alert as any strengthening of rupee makes the exports costly because of which they loose their competitiveness. Reason given is that this has an adverse affect on the country’s Balance of Payments Surplus and it pulls down the economic growth. Lobby of the exporters also stands up and tries to make its voice heard in the corridors of the Union Government. Hence, this paper has been written with the objective of finding whether there is any relationship between the growth in exports and the depreciating Rupee.
Introduction
In last few days, several articles have been written about the appreciation of Rupee and its effect on the competitiveness of the Indian exports.
This is due to the RBI’s policy of letting Rupee to rise in order to tame the inflation. Till now, whenever Rupee appreciated, RBI intervened by buying the dollars from the market and releasing the equivalent amount of Rupee in the economy which increased the money supply. An increase in the money supply to a particular extent is fine but subsequently it leads to inflation – too much money chasing too few goods. With Indian economy already having a high level of inflation due to supply side constraints, any attempt by the RBI to stem the appreciation of Rupee would have increased the supply of money and hence inflation. That is why; RBI stopped buying dollars which caused appreciation in Rupee.
People have differing views about RBI’s policy. One view is that on account of the appreciating Rupee, our exports will loose their sheen and the trade deficit will increase. Another view is that the appreciating rupee is an indicator of the strong growth of our economy, which has resulted in higher FDI and FII inflows, and there is no harm in what RBI is doing currently. Exporters need to pull on their socks and focus more on cost reduction and quality improvement. In the long run, it is the competitiveness that matters and not the depreciation in Rupee.
Overview
If we observe the trend of Indian exports, India has exported goods and services worth $ 125 bn in the financial year 2006-07 which was just $ 2 bn in 1970-71. Thus exports have grown at a Compounded Annual Growth Rate of approx. 12% p.a. Currently the share of India in the World trade is about 1.5% which is expected to cross 2% in 2009. Similarly, the average exchange rate was Rs. 7.56 per USD in the year 1970-71 which has increased to Rs. 45.25 per USD in 2006-07. The lowest level which the Rupee had touched was in 2002-03 when the average exchange rate was Rs. 48.40 per USD.
Analysis
An important question is that if the Indian exports have grown over the years at a steady rate, has depreciation in Rupee played some role in it. Can the exchange rate explain the variance in the exports?
To find out the answer, investigative studies have been carried out by the author through regression analysis based on data of Rs./$ exchange rate and exports denominated in USD. Dependent variable (Y) is the growth in exports and independent variable (X) is the depreciation in Rupee.
An important question is that if the Indian exports have grown over the years at a steady rate, has depreciation in Rupee played some role in it. Can the exchange rate explain the variance in the exports?
To find out the answer, investigative studies have been carried out by the author through regression analysis based on data of Rs./$ exchange rate and exports denominated in USD. Dependent variable (Y) is the growth in exports and independent variable (X) is the depreciation in Rupee.
Study I
The period of study was taken as FY 1971-72 to FY 2006-07 i.e. sample size of 36 years.
The results showed that there exists a moderate degree of negative correlation between the depreciation in Rupee and the increasing exports with a correlation of -0.43. Coefficient of determination is 19% which indicates that 19% variation in the growth of exports can be explained by the depreciation in Rupee which means that remaining 81% variation remains unexplained by depreciation in Rupee.
However these results cannot be given much significance as in pre-1990 scenario our economy was not an open one with many trade regulations and exchange controls. It was in the beginning of 1990s that several economic reforms were introduced which involved the deregulation of exports. Also, Rupee was made fully convertible on trade account in February 1993 and on current account in August 1994.
Study II
Keeping in view these facts, another analysis was carried out for the post-reforms period - FY 1993-94 to FY 2006-2007 i.e. sample size of 14 years.
This time the coefficient of correlation is -0.72¸which indicates high degree of negative correlation with 51% of the variation in the growth of exports being explained by the depreciation in Rupee.
The analysis showed that there is negative correlation between the two variables under study however; the extent of explained variation was more in second study. Also, both of these tests have shown significant linear relationship through F Test.
The period of study was taken as FY 1971-72 to FY 2006-07 i.e. sample size of 36 years.
The results showed that there exists a moderate degree of negative correlation between the depreciation in Rupee and the increasing exports with a correlation of -0.43. Coefficient of determination is 19% which indicates that 19% variation in the growth of exports can be explained by the depreciation in Rupee which means that remaining 81% variation remains unexplained by depreciation in Rupee.
However these results cannot be given much significance as in pre-1990 scenario our economy was not an open one with many trade regulations and exchange controls. It was in the beginning of 1990s that several economic reforms were introduced which involved the deregulation of exports. Also, Rupee was made fully convertible on trade account in February 1993 and on current account in August 1994.
Study II
Keeping in view these facts, another analysis was carried out for the post-reforms period - FY 1993-94 to FY 2006-2007 i.e. sample size of 14 years.
This time the coefficient of correlation is -0.72¸which indicates high degree of negative correlation with 51% of the variation in the growth of exports being explained by the depreciation in Rupee.
The analysis showed that there is negative correlation between the two variables under study however; the extent of explained variation was more in second study. Also, both of these tests have shown significant linear relationship through F Test.
Interpretation and conclusion:
Though both of these studies have got some merits and demerits, we can conclude that that either there is high or moderate degree of negative correlation between the growth in exports and the depreciation in Rupee. It doesn’t matter which study you give importance too, unless the correlation is significantly positive, which hasn’t been proved.
However, as explained earlier, prior to the introduction of economic reforms, our economy was constrained by several rules and regulations and thus the figures of exchange rates and exports may not show us the true picture. In that case, Study II stands out and its results can be considered significant which indicates that there is high degree of negative correlation between the growth in exports and the depreciation in Rupee.
Thus, it can be said that in the long-run, exporters should not get worried whenever Rupee appreciates and, if they keep their thinking hats on they will keep getting better and better and exports are going to increase at a healthy rate.
Further, RBI’s policy of allowing the Rupee to appreciate should be seen in the right perspective. Any appreciation in the Rupee indicates growing strength of the Indian economy with several implications – some positive while some negative. Important thing is whether positives outweigh negatives.
On a lighter note, who would like to buy just a US Dollar by paying 40 Rupees!!
Acknowledgement:
Author is thankful to Dr. Thomas Mathew and Mrs. Jaskiran Arora for valuable help provided during the preparation of this paper.
Author is thankful to Dr. Thomas Mathew and Mrs. Jaskiran Arora for valuable help provided during the preparation of this paper.
References:
1. The Economic Survey 2006-07 – www.indiabudget.nic.in
2. Reserve Bank of India’s website – www.rbi.org.in
3. Ministry of Commerce’s website – www.commerce.nic.in
4. “Exports, more than rupee's worth”, Rohit Pandit, Business Line, 25th May 2007
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