Analysis of the paradox of increasing exports with an appreciating rupee

Abstract

The present study attempts to examine the following questions in the Indian context. What is the composition of our exports? What are the factors that determine the exchange rate? How does the REER/NEER impact the Exchange rate? What led to the increase in the exports? What are the factors that caused that increase? What are the steps that RBI can take in the present situation? Indian Exports have been increasing consistently for quite a few years now. According to the macroeconomic theory if there is an appreciation of the home currency it should result in a decrease of the exports and consequently if there is a depreciation of the home currency it should result in an increase. However our currency has been appreciating with respect to the dollar and our exports too have been increasing time and again resulting in a paradox! 3 In this paper we look at the various factors that affect exports and their correlation with the exports. However the study seems to suggest that our exports have become more competitive and the demand for our traditional goods are highly inelastic. We also have always enjoyed a cost advantage especially in the IT sector. Hence these determinants indicate that the exporters need not be protected by artificially depreciating the Rupee and that they can sustain a little appreciation of the rupee in terms of the dollar. Hence RBI can afford to intervene to a lesser degree in order to maintain stability of the rupee.