Page 35 - Banking Finance December 2016

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exports and real effective exchange rate (REER) between going into final products are being sourced from inside a
2002 and 2015. country than from outside. Some global supply chains are,
therefore, contracting. He thinks that due
to these reasons the heady days when In-
dian trade in goods and services were ex-
panding at a double digit pace will probably
only be a memory for some time and we
have to get used to a new normal - a
slower growth rate in exports.

He has also made it clear that while rupee
depreciation helps one section, there are
many others who are hurt by it. Again, a
sharp depreciation will stir the road to-
wards internationalising the rupee, which
is one of RBI's long-term goals. The central
bank has, rightly, adopted the strategy of
Source : India Ratings & Research, Reserve Bank of India
intervening only when there is excessive
Till 2013, the relationship between export growth and REER volatility, preferring to stay on the sidelines at other times.
was mixed (See chart). After this period, it exhibits a clear
trend that an overvalued rupee has affected the growth of There have been mixed conclusions from various studies on
India's exports. This corroborates a well-tested hypothesis the impact of exchange rates on Indian exports. However,
that "a stronger currency is not good for export outlook". one has to keep in mind that a relatively undervalued cur-
Many countries in East Asia including China pursued the rency does not generate additional demand nor is it a per-
strategy of relatively undervalued currency to make their manent solution to all the ills prevailing in the domestic
exports competitive in global market under their export led economy. But in a highly complex and competitive world,
industrialisation. where countries are competing for their export interest,
the value of currency must be fairly placed vis-à-vis com-
The Finance Minister Arun Jaitley also said that the gov- peting currencies to make one's export competitive.
ernment would like the rupee to reflect its real value.
Raghuram Rajan has been brushing aside the Centre's alle-
gation by putting forth arguments for what, according to
him, are the actual reasons for the sad state of affairs of
Indian exports - a slowing of global trade and a shift in
importing patterns of global economies.

He explained that the reasons for slower growth in global
trade compared to growth in global GDP were threefold.
Firstly, as countries get richer, non-traded services consti-
tute a greater fraction of GDP, causing GDP to grow faster
than trade. Secondly, with trade-intensive capital goods'
investment muted because of global overcapacity, trade
grows more slowly than GDP.

Finally, as industrial countries become more competitive,
and as China moves up the value chain, more of the inputs

BANKING FINANCE | DECEMBER | 2016 | 35

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