Why a weakening rupee is not always good for exports

The rupee has fallen steadily over the past two weeks as foreign portfolio investors pulled out money from the stock and bond markets amid global uncertainties caused by the war in Ukraine. While it has recouped some of its value in the past two days, experts say the currency is expected to stay volatile for the foreseeable future.

After reaching a record low of 77.14 to the dollar on March 7, the rupee gained slightly to 76.27 on March 11. However, this still represents a fall of 2.31 percent since the beginning of the year.

Back in February, the Federation of Indian Export Organisations (FIEO) had asked exporters to prepare for a fall in the rupee and, subsequently, higher chances of Indian exports being more competitive. The guidance came after strong capital outflows in many emerging economies resulted in the depreciation of their currencies.

FIEO president A Sakthivel said that while rupee depreciation would help strengthen exports, it would also raise input costs for the downstream manufacturing sector as well as a large segment of exporters.

Meanwhile, prices of capital goods made from metals have already risen, Engineering Exports Promotion Council chairman Mahesh Desai said. “Shipping costs which have already gone through the roof would further hurt exporters,” he said.

Multiple industry bodies have written to the government to consider easier credit norms and other policy help for small exporters in the light of the latest currency movement, sources said.

India’s exports have been on a growth streak over the past one year, owing to an unprecedented pick-up in global demand after a year lost to COVID-19. As a result, for the first time since coming to power in 2014, the Narendra Modi government is set to meet its annual export target this year, currently pegged at $400 billion.

Costlier imports

However, inbound shipments have also ballooned over the same period, and the rupee’s fall is expected to increase the import bill further.
As India is a net importer, this leads to a widening of India’s trade deficit, the difference between the total exports and imports over a period. For the first 11 months of FY22 (2021-2022), the trade deficit stood at $176 billion, a result of already large import volumes.

Combined with the geopolitical risks arising from the Russia-Ukraine conflict, the weakening rupee is also expected to push the import bill higher for key items beyond petroleum and edible oils, according to India Ratings and Research (Ind-Ra). While all imports are set to get costlier, the cascading effect of a fast-depreciating currency is set to result in higher prices of imported gems and jewellery, fertilisers, and capital goods, it said.

“The immediate impact of the conflict on the Indian economy will be felt through inflation, an increase in the current account deficit, and rupee depreciation. A $5/barrel (bbl) increase in crude oil prices will translate into a $6.6 billion increase in the trade deficit,” Ind-Ra said in a report earlier this week.

A whole host of goods, from basic medicines to luxury items like cars apart from crude oil, have become costlier due to the rupee’s depreciation. International services such as travel and student loans for overseas studies are also set to become costlier. It also leads to an outflow of foreign funds on the back of falling investor returns.

The rupee’s latest slide also comes at a time when imports have skyrocketed. In February, imports rose by 35 percent from a year earlier, to $55 billion. As a result, cumulative inbound trade in the first 11 months of FY22 stood at $550.1 billion. This was 59 percent higher than the $345 billion worth of imports registered in the same period of FY21.
Imports constituted Rs 10.15 lakh crore of India’s GDP in Q3FY22, up from Rs 7.65 lakh crore in Q3 FY21. Quarterly imports have risen for the past five quarters now.

“In a post-Covid setting, policymakers are satisfied with imports growing since it signifies higher consumer and industrial demand. However, this trend is set to continue for the next four to five months. Measures may need to be taken to curtail the import bill if it extends beyond that,” a senior finance ministry official said.

Waiting it out

As a result of India’s large exposure to global goods and services, a fall in the value of the rupee also leads to inflation in the domestic market and causes a further surge in already-elevated input costs for companies, further eroding their margins, experts say.

However, the commerce department has not sounded the alarm as yet, believing the currency volatility will reduce in the next few weeks as the Ukraine crisis reaches a turning point.

“Exports depend more on global demand than the currency rate and India’s exports are broadly expected to remain stable and rise in the near future. But significant global developments such as this might negatively affect the process if the current situation becomes entrenched,” a senior official said.

The government does not expect the rupee to strengthen beyond the level of 74 to the dollar for quite some time, even after the Ukraine crisis subsides, he added.