After contracting 3.5% y-o-y in February, exports have once again dipped 3.2% y-o-y in March to $29.57 billion. A glance at the data shows a fairly clear correlation between exports and the value of the currency; between September and January, when the rupee was relatively weak, although off its lows, exports performed well; but they have fallen off in the last couple of months, as the currency strengthened. On the back of strong foreign flows into the Indian equity and bond markets, the rupee has been among the strongest currencies in the region, having gained 3% in just the last three months or so?the only currency in Asia to have outperformed the rupee is the Indonesian rupiah.
From its lows of late August, the gain is of course a much bigger 14.4%. Given that yields on Indian paper remain high?the yield on the ten-year benchmark is 9%?and that there is a fair chance of a strong coalition assuming power at the Centre, the currency could strengthen further. The strong currency is clearly hurting exports?on a favourable base, FY14 exports of $312 billion came in below the modest target of $320-325 billion. Rising wages and energy prices in China, along with a strengthening currency?the renminbi has gained 6.8% since January 2011, though it has lost 2.5% since January 23, when Argentina devalued the peso?offered India a window to grow its exports, but that is something the strengthening currency is eroding.
If the rupee was strengthening because India?s productivity was growing, or its exports rising, that would be one thing. What is being seen, however, is just speculative flows which are artificially propping the rupee. While RBI Governor Raghuram Rajan says he thinks 55 would be too strong a level for the rupee, he did point to a finance ministry study which felt 60-62 would be a fair value for the currency. RBI?s monthly estimate of the real effective exchange rate, based on CPI inflation, is at 111.4 in March, suggesting the rupee is at a 10% premium to the fair value. China and others have gained by being mercantilist for decades; RBI is not being asked to be that, it merely needs to ensure the rupee is at a fair value.
