Exports and currency movements

Rohit Joshi and Siddharth Tak/Zee Research Group

While the Indian rupee got depreciated by nearly five per cent in May 2013, Indian exports contracted in the month by 0.13 per cent to Rs 134807.62 crore on a year-on-year (YoY) basis. In dollar terms too, it declined by 1.1 per cent to 24.5 billion dollars. Surprisingly, it was for the first time in this calendar when exports contracted. Theoretically, this shouldn’t have been the case as it is assumed that rupee depreciation generally pushes exports upwards. But, the moot question is: Are exports primarily dependent on the currency movements? No! Say experts who suggest that exports mainly depend on the demand prevailing in the global economy.

Similarly, in May 2012 when the rupee weakened by around six per cent, exports in dollar terms declined by 4.16 per cent to 25.68 billion dollars on YoY basis. However, in rupee terms exports increased by 16.26 per cent on YoY basis. Furthermore, in June 2012, when rupee depreciated by 0.36 per cent, exports in dollar terms declined by 5.45 per cent to 25.07 billion dollars on YoY basis. However, in rupee terms exports increased by 18.11 per cent to Rs 140452.05 crore on YoY basis. On sequential basis too, in rupee terms exports increased by 0.4 per cent in June 2012 over May 2012. Taking into account the slowdown in global economy, exports declined by 1.76 per cent to 300.6 billion dollars in fiscal 12-13.

Rejecting the hypothesis, Madan Sabnavis, chief economist at CARE Ratings, opined, “As of now there is no correlation between export and currency movements. Last year, even though rupee depreciated we have not seen our exports picking up. Exports are demand driven and are dependent on the quality and global conditions. Slowdown in major export markets had led to lower growth in our exports. I don’t think that we have the major competitive advantage because of rupee depreciation.”

Sabnavis’ thought got an endorsement from Brinda Jagirdar, consulting economist (former chief economist at SBI) who averred, “Export is very much demand driven and depends on the conditions prevailing in the importing country. The moment currency falls, immediately importers start re-negotiating the price. Hence, it is not such a big advantage as it tends to get offset by the importer negotiating skills. Exports can’t be pushed by rupee depreciation alone but you need to add value to it. It is the quality of exports which is the primary determinant rather than the price of currency.”

Reasoning out the lower demand for Indian exports, Sunil Sinha, head of economic research and chief economist at rating agency Crisil, said, “In case of India, US and Europe continued to be the traditional market for exports including some new markets like Middle East and China. But whenever there is a global slowdown then it leads to lesser demand of exported goods from India. Even the rupee depreciation has not been too effective in terms of really pushing the export demand.”

The recent PMI (purchasing manager`s index) for new export order rose to 54.4 in June 2013 as against a figure of 54.04 posted in May 2013. The rise in this parameter can be considered as a positive sign for the India`s manufacturing export.

Commenting on this indicator and referring to the export outlook, Sabnavis at CARE Ratings said, “This leading indicator (PMI) is based on a survey and provides data on monthly basis (relative to last month). Any improvement over the month of May 2013 doesn’t necessarily mean that you will witness an improvement over June 2012. In the coming months, exports should improve owing to positive impulse seen in the US economy. Although we are not looking for double digit growth in exports yet in FY14 we expect 6 -8 per cent growth in exports.”

However, Jagirdar argued, “Exports depend on the global conditions. Overall, global economy is still not robust hence I don’t see immediate turnaround in exports.”

Reiterating the view, Sinha at Crisil said, “Around September-October (festival season) you might see some turnaround in exports but overall we expect export growth to remain sluggish. On the whole, things would change only when we see a revival in the overall growth prospects of our major trading partners.”