(Bloomberg) -- A weak currency is good for exports. In India’s case, the script is not so straightforward.
While the rupee is Asia’s worst-performing major currency this year, a demand-killing trade war threatens Indian exports that have already been hurt by policy disruptions over the past two years. History shows the currency’s moves have hardly impacted shipments. If anything, a slide in the rupee has ended up inflating the nation’s import bill.
“The situation for export prospects is weak given the kind of trade war happening in the world,” said N.R. Bhanumurthy, an economist at Delhi-based National Institute for Public Finance and Policy and a co-author of a 2013 paper on whether rupee’s weakness matters to Indian manufacturing exports.
Unlike China, Taiwan and South Korea, India isn’t part of big supply chains globally. Trade tensions between the U.S. and China have prompted export-reliant countries like Vietnam to guard against Chinese products flooding their local markets. India’s goods exports contribute only about 12 percent of gross domestic product and government officials have blamed its poor showing on the rupee’s strength.
The rupee slumped to a new low of 69.1275 per dollar on Friday as the Chinese yuan dragged most Asian currencies down, before reversing some losses to trade at 68.8613 level as of 12:23 p.m.
The rupee’s level will adversely impact manufacturing as domestic prices of imports will go up, said Ajay Sahai, director general of the Federation of Indian Export Organisations. Since many currencies like those of Turkey, Brazil, Argentina, Mexico, Russia and South Africa are depreciating at a faster pace, India may face increasing competition in markets where it’s competing with them, he said.
The rupee continues to be overd on a real effective exchange rate despite the slide, and there was no question about being nervous about the depreciation, said Rajiv Kumar, vice chairman of think-tank NITI Aayog. Modi’s chief economic adviser, Arvind Subramanian, also welcomed the rupee’s decline, adding that it was a natural adjustment that was taking place.
Along with rising oil prices and Indians’ love for electronic goods made abroad, an adverse terms of trade position could widen the country’s current-account deficit.
“The rupee’s weakness against the dollar along with rising oil prices has increased India’s import bill,” said Rohan Chinchwadkar, an assistant professor of finance at the Indian Institute of Management at Tiruchirappalli in southern India. “Despite the depreciation, export growth continues to be weak because of rising protectionism, sluggishly recovering global growth and disruption of domestic supply chains.”
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