Weak Indian rupee is good for export, but not as good as it seems

The Indian rupee's exchange rate against major global currencies is a perpetual topic of discussion, especially in the context of India's trade dynamics. Traditionally, a weaker domestic currency, or depreciation, is viewed as a boon for a country's exports. The conventional economic wisdom posits that when the rupee depreciates, Indian goods and services become cheaper for foreign buyers, thereby boosting demand and increasing export volumes. Simultaneously, imports become more expensive, discouraging domestic consumers and businesses from buying foreign goods, which ideally helps in narrowing the trade deficit. This perspective has long guided policy discussions and market expectations.

However, recent studies have introduced a nuanced, and somewhat counter-intuitive, understanding of this relationship for India. These analyses suggest that while a weaker rupee does offer some advantages, its overall positive impact on India's trade balance is significantly limited. This limitation stems primarily from the structural characteristics of India's export basket and its integration into global supply chains.

**Background Context:** India, since its economic liberalisation in 1991, has progressively integrated into the global economy. While services exports have consistently been a strong performer, merchandise exports often face challenges. India has historically run a trade deficit, meaning its imports of goods and services exceed its exports. Managing this deficit is crucial for macroeconomic stability, and a weaker rupee was often seen as a natural corrective mechanism. The Reserve Bank of India (RBI), under the Reserve Bank of India Act, 1934, is tasked with maintaining price stability and supporting growth, which implicitly involves managing exchange rate volatility to ensure orderly market conditions, though it does not target a specific exchange rate.

**What Happened (The New Insights):** The core finding of these new studies is that the expected export boom from a depreciating rupee does not materialise across all sectors, and its net effect on the trade balance is minimal. The primary reason is the high import content embedded within many of India's export-oriented industries. For instance, sectors like electronics, machinery, certain chemicals, and even parts of the automotive industry rely heavily on imported raw materials, intermediate goods, or advanced machinery. When the rupee weakens, the cost of these essential imported inputs rises, effectively eroding the price advantage gained by the cheaper exports. The net value addition domestically, in many such cases, is not substantial enough to offset the increased input costs.

Crucially, the studies highlight that only specific segments consistently benefit from a weaker rupee: food and agro-based exports. These sectors typically have a lower import dependency for their inputs, meaning the cost advantage from a depreciated rupee translates more directly into competitive pricing for international markets. Conversely, labour-intensive sectors like textiles and leather, which are vital for employment generation in India, are found to be negatively impacted. This could be due to factors such as competition from countries with even lower labour costs, reliance on imported dyes, chemicals, or specialised machinery, or perhaps the demand elasticity for these products not being high enough to respond significantly to price changes.

**Key Stakeholders Involved:**

* **Exporters:** Directly impacted by currency fluctuations, facing either benefits (agro-exporters) or challenges (import-dependent exporters, textiles, leather).

* **Importers:** Face higher costs, potentially leading to increased domestic prices for imported goods (e.g., crude oil, electronics).

* **Reserve Bank of India (RBI):** Monitors the rupee's movement, intervenes in the foreign exchange market to curb excessive volatility, and manages monetary policy that influences capital flows.

* **Government of India (Ministry of Finance, Ministry of Commerce & Industry):** Formulates Foreign Trade Policy (FTP), offers export incentives, and seeks to manage the trade deficit. The Foreign Trade (Development and Regulation) Act, 1992, provides the legal framework for these policies.

* **Consumers:** Bear the brunt of imported inflation, especially for essential commodities.

* **Foreign Investors:** Their investment decisions are influenced by currency stability and potential returns, affecting capital inflows and outflows.

**Why This Matters for India:** This revised understanding has profound implications for India's economic strategy. If a weaker rupee isn't a silver bullet for the trade deficit, then the government and policymakers need to re-evaluate export promotion schemes outlined in the Foreign Trade Policy (such as the FTP 2023). It underscores the need to focus on increasing domestic value addition, reducing reliance on imported inputs, and boosting indigenous manufacturing capabilities under initiatives like 'Make in India'. The negative impact on labour-intensive sectors like textiles and leather is particularly concerning, as these industries are crucial for job creation and poverty reduction. Furthermore, sustained rupee depreciation without a corresponding boost in exports exacerbates imported inflation, affecting the purchasing power of citizens and challenging the RBI's mandate of price stability.

**Future Implications:** Moving forward, India's economic policy must aim for structural reforms to enhance export competitiveness beyond just currency depreciation. This includes improving logistics, reducing the cost of doing business, investing in research and development to develop domestic alternatives for imported inputs, and diversifying the export basket towards high-value, less import-dependent goods. The government might need to reassess the efficacy of various export promotion schemes, ensuring they target sectors with high domestic value addition. The RBI's role in managing currency volatility will remain crucial, balancing the need for stability with market-driven adjustments. Ultimately, India's journey towards becoming a global manufacturing and export hub will depend less on a weak rupee and more on fundamental improvements in productivity, innovation, and global competitiveness.