Exports Rise Over Three-Fold In 5 Years Despite Rupee Swings.

India's exports expanded threefold over the last five years despite wild currency fluctuations, a telltale fact that points to the country's potential to be a large player in global trade.

This also raises a basic question. Do the country's exporters need government intervention to deal with volatility in exchange rates? Small and medium exporters that account for about 45-50% of the country's exports are known to be highly susceptible to such fluctuations.

Economists tend to play down the impact of currency value on a country's exports.

"Global demand conditions have a larger effect on export growth," says Yes Bank chief economist Shubhada Rao .

There have been periods when India's exports defied a rising rupee to post smart gains, pointing to other factors having a much larger effect trade. Monthly data for the last five years shows there has been an increase in exports regardless of the exchange rate.

"There is no clear relationship between changes in exchange rates and change in exports," says a recent report by rating agency CARE.

India's exports rose more than 15% in the first eleven months of the current fiscal to over $200 billion, when the rupee swung between Rs 43.9 to Rs 47.49 a dollar .

The nature of India's exports also provides a cushion against volatility in exchange rates that could affect competitiveness.

"India exports more conventional commodities, demand for which is more inelastic," says Madan Sabnavis, chief economist of ratings firm CARE.

Some other experts doubt if exporters can deal with this type of volatility year after year.

"The three-month implied volatility on USD/INR remains relatively elevated over the past 12 months at around 9.4 vols compared with the pre-US financial crisis levels of around 5.8 vols in 2006-2007," says Craig Chan, executive director, foreign exchange research at Nomura.

Biswajit Dhar, director general of New Delhi-based think-tank Research and Information System for Developing Countries agrees.

"The band (of rupee movement) seems to be expanding despite RBI interventions," he says.

Capital flows in and out of India could keep volatility elevated, says Chin Loo, senior forex and interest rate strategist at BNP Paribas Asia.

"The Indian government is opening the financial market slowly," he says.

Are Indian exporters equipped to deal with rupee appreciations as high as 8% that was witnessed last year?

Mr Sabnavis says the answer lie in the exporters' position in the value chain. While Germany managed to stay atop the list of exporting nations because of its high value-added exports, China depends on its undervalued currency and cheap labour to be among the world's largest exporters.

"The essential difference lies in the export basket as Germany exports high-tech goods while China exports goods at the lower end of the value chain," he says.

India, too, has a large community of micro and small exporters, which manufacture low-tech products. India exporters also suffer because they have little access to advanced hedging instruments.

"It is true that such exporters have been suffering due to the recent fluctuations in the exchange rate and they can't do much about it on their own" says Mr Dhar.

Since most of these exporters do not hedge risks, the government cannot ignore the effect of a volatile rupee on them, says Ajay Sahai, director general of exporter's body Fieo..

While admitting that volatility has hurt small exporters, RBI deputy governor Subir Gokarn said at a recent seminar that India will have to evolve low-cost hedging options.

Source : economictimes.indiatimes.com