Do you think the recent appreciation of Indian currency is harming India's exports? Can it have a beneficial side too? Explain in brief.

Harmful Effects on Exports

Currency appreciation directly impacts export competitiveness. When the INR appreciates, Indian goods become relatively more expensive for buyers in other countries, leading to:

• Reduced Export Volume: Higher prices can decrease demand for Indian exports, especially in price-sensitive markets. Sectors like textiles, leather goods, and gems & jewellery, which rely heavily on price competitiveness, are particularly vulnerable.
• Lower Export Revenue: Even if export volumes remain stable, exporters receive fewer dollars (or other foreign currencies) for each unit sold, reducing their revenue in INR terms.
• Impact on MSMEs: Micro, Small, and Medium Enterprises (MSMEs), which often have limited hedging capabilities, are disproportionately affected by currency fluctuations.
• Increased Trade Deficit (potentially): While a stronger Rupee can reduce import costs, if export growth slows significantly, it could widen the trade deficit.

For instance, in 2023-24, India’s engineering goods exports faced headwinds due to the appreciating Rupee, impacting their growth rate (EEPC India data). The pharmaceutical sector, while less price-sensitive, also experiences some impact on profitability.

Beneficial Side Effects

Despite the challenges, Rupee appreciation can also offer certain benefits:

• Cheaper Imports: A stronger Rupee reduces the cost of imported raw materials, intermediate goods, and capital goods. This benefits industries that rely heavily on imports, such as electronics manufacturing and automobile production.
• Reduced Inflation: Lower import costs can help contain inflationary pressures in the economy.
• Increased Purchasing Power: A stronger Rupee increases the purchasing power of Indian consumers, allowing them to buy more imported goods.
• Attracts Foreign Investment: A stable and appreciating currency can signal economic strength and attract foreign direct investment (FDI).
• Reduced External Debt Burden: For companies with external debt denominated in foreign currencies, a stronger Rupee reduces the burden of repayment.

The IT sector, which earns a significant portion of its revenue in foreign currencies, benefits from a stronger Rupee as it reduces the cost of domestic operations. Similarly, the automobile industry benefits from cheaper imports of components.

Mitigating Factors & Government Response

The extent to which Rupee appreciation harms exports depends on several mitigating factors:

• Global Demand: Strong global demand can offset the negative impact of a stronger Rupee.
• Hedging Strategies: Exporters who effectively hedge their currency risk can minimize the impact of fluctuations.
• Government Policies: The government can implement policies to support exporters, such as export incentives and infrastructure development.

The Reserve Bank of India (RBI) often intervenes in the foreign exchange market to manage volatility and prevent excessive appreciation. The government also provides export promotion schemes like the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme to offset the impact of taxes and duties on exports.

Impact of Rupee Appreciation	Positive Effects	Negative Effects
Imports	Cheaper raw materials & capital goods	-
Exports	-	Reduced competitiveness, lower revenue
Inflation	Reduced inflationary pressure	-
Investment	Attracts FDI	-