1 Rajan Goyal, Director Department of Economic and Policy Research Reserve Bank of India World Trade Organisation, Geneva March 27, 2012 Exchange Rate

1

Rajan Goyal, Director

Department of Economic and Policy Research

Reserve Bank of India

World Trade Organisation, Geneva

March 27, 2012

Exchange Rate and Trade Flows – Indian Experience

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India’s Export Import Growth vis-à-vis World

India’s trade volumes have grown much faster than the world growth in the recent years.

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Exchange Rate and Trade Flows

Structure

Exchange Rate Behaviour

Sensitivity of Trade Flows

Trade Performance

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Rupee in nominal terms steadily depreciated over the years.

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Since 1993, Rupee in real terms has largely remained range bound

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Current Account Balance doesn’t explain the volatility in exchange rate

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Significant co-movement between capital flows and exchange rate

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Capital flows are potent factor explaining x rate volatility


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Behaviour of Exchange Rate Rupee was overvalued and administratively pegged

prior to 1993. Since 1993, movement in nominal exchange rate are

largely reflective of inflation differential. Accordingly, real effective exchange rate has remained

close to base level and movements have been largely range bound.

Large variations in capital flows tend to cause exchange rate volatility.

Movements in exchange rate are reflective of market conditions.

Reserve Bank doesn’t have an exchange rate target or a band.

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Whether Exchange Rate is fairly valued?

3 Methodologies: Real Effective Exchange Rate Sustainable level of CAD Macro Balance Approach

Growth differential Demography Oil balance Stage of development Fiscal deficit

No clear message. IMF analysis (2010) showed Rupee is fairly valued.

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Sensitivity of Trade Flows to Exchange Rate

Authors Period Export Elasticity Import Elasticity

Houthakker and Magee

1951-1966 -0.23 -

T.N. Srinivasan 1963-1994 -0.53 -

Dipendara Sinha 1960-1996 -0.55 0.51

Dholakia, et al 1980-1996 -0.95 0.38*

UNCTAD 1970-2008 -0.54 -

Reserve Bank of India – Annual Report 2009

1996-2009 Trade balance improves by 0.7 per cent with 1 per cent depreciation in rupee in

real terms.

* Insignificant

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Elasticity has risen over the period Exchange rate pass through Response to export – import prices

Import sensitivity Gold and Oil Non oil and non gold imports

Marshall-Lerner condition

trade balance is negatively related to exchange rate movement

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Growth in Export – Import and Variation in Real Effective Exchange Rate

Year REER Export Import

1976-80 -0.2 12.9 22.4

1981-85 -1.2 1.1 0.4

1986-90 -5.1 15.4 8.6

1991-95 -4.0 12.3 10.2

1996-00 0.5 7.3 6.8

2001-05 0.6 18.8 25.0

2006-11 0.0 20.8 19.5

Given two way movement in exchange rate, sustained rise in trade volumes can’t be explained solely in terms of exchange rate variations

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Trade Flows and Exchange Rate Volatility

Impact on export and import prices and profitability of the trade sector

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Trade Performance

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Trade Performance

India’s exports and imports grew faster than growth world trade after reforms

Period

Export Import Export Import Export Import1950-59 1.8 4.0 7.9 7.3 1.8 2.11960-69 3.7 1.3 10.4 10.2 1.1 1.71970-79 15.6 18.7 20.5 20.3 0.6 0.71980-89 8.3 8.0 7.5 7.4 0.5 0.71990-99 8.8 10.6 6.8 6.7 0.6 0.62000-04 16.2 16.5 10.4 10.6 0.7 0.82005-07 26.9 33.1 15.0 14.8 0.9 1.32008-10 14.5 15.8 4.4 4.4 1.2 1.8

Indicators of India's Export Growth, 1950-2011

India WorldAverage Annual Growth Rates

(Average)India's Share in World Export

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Trade Performance

Opening up of India’s External Sector

Liberalized trade regime from the early 1990s Integrated Policy Framework to improve

overall productivity and efficiency Move towards unified market determined exchange rate

system Lowering down of tariffs rates Withdrawal of quantitative restrictions Phasing out of the system of licensing

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Customs Duty RateYear Peak Rate*

1991-92 1501992-93 1101994-95 651997-98 402001-02 352002-03 302004-05 202005-06 152006-07 12.52007-08 102009-10 102010-11 10

* On Non-Agricultural Goods

Trade Performance

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Trade Performance

Indian exports steadily diversified towards developing and emerging market economies

Year 1987-90 1990-00 2000-04 2004-08 2008-11I. OECD countries 57.5 57.1 49.3 42.0 35.3

A. All EU Countries 24.8 26.6 22.3 21.3 19.8B. All North America Countries 18.6 20.4 20.9 15.7 11.3C. All Asia and Oceania Countries 11.6 7.9 4.4 3.3 2.8D. All Other OECD countries 2.5 2.1 1.7 1.6 1.4

II. Total OPEC 6.3 9.7 12.9 16.1 21.3III. Total Eastern Europe 17.6 5.2 2.6 1.5 1.1IV. Total Developing countries 15.6 26.7 32.8 40.1 39.7A. All Asian Countries 13.1 21.3 25.8 30.5 29.7

A(i). SAARC 2.6 4.4 5.3 5.5 4.8A(ii) Other Asian developing countries 10.5 16.8 20.5 25.0 24.9

China People's Republic of 0.3 1.2 3.3 6.6 6.5B. All African Countries 2.0 4.0 4.8 6.5 6.3C. Latin American countries 0.5 1.4 2.2 3.1 3.7V. Others / unspecified 3.0 1.4 2.3 0.4 2.7Total Trade (I+II+III+IV+V) 100.0 100.0 100.0 100.0 100.0

DIRECTION OF EXPORTS OF INDIA'S FOREIGN TRADE -SHAREPer cent

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Trade Performance

Indian exports slowly moving up the value chain imparting resilience.

Year/ Commodity 1987-90 1990-00 2000-04 2004-08 2008-11I. Primary Products 24.1 21.5 16.1 16.2 14.1 a. Ores and Minerals 5.8 3.6 3.3 5.7 4.4II. Manufactured Goods 71.0 75.9 76.3 67.5 66.0 A. Leather and Manufactures 7.5 5.5 3.8 2.4 1.7 B. Chemicals and Related Products 8.1 11.5 14.1 13.8 12.1 C. Engineering Goods 11.1 13.8 17.2 22.3 25.1 D. Textile and Textile Products 23.0 26.0 22.4 14.0 10.3 E. Gems and Jewellery 19.3 16.8 16.7 13.6 15.9 F. Handicrafts (excluding Handmade Carpets) 1.4 1.5 1.2 0.4 0.1 G. Other Manufactured Goods 0.6 0.7 0.9 0.9 0.8III. Petroleum Products 3.0 1.3 4.9 13.8 15.9IV. Others (All Commodities) 2.0 1.2 2.7 2.5 4.0V. Total Exports 100.0 100.0 100.0 100.0 100.0

INDIA's EXPORTS OF PRINCIPAL COMMODITIES - SHAREPer cent

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Trade Performance

Share of developing economies in total imports rising, largely on account of China

Per cent Year 1987-90 1990-00 2004-08 2008-11I. OECD countries 60.3 51.3 35.3 31.5

A. All EU Countries 32.8 26.6 16.1 13.1B. All North America Countries 12.3 10.6 7.8 6.4C. All Asia and Oceania Countries 11.5 9.5 6.1 6.1D. All Other OECD countries 3.6 4.7 5.3 5.8

II. Total OPEC 13.7 21.9 22.2 32.9III. Total Eastern Europe 8.2 3.3 2.0 2.0IV. Total Developing countries 17.8 23.5 29.4 32.5A. All Asian Countries 12.7 17.4 23.6 26.3

A(i). SAARC 0.4 0.7 0.9 0.6A(ii) Other Asian developing countries 12.3 16.7 22.7 25.7

China People's Republic of 0.4 1.9 9.0 11.0B. All African Countries 3.0 4.4 3.5 4.0C. Latin American countries 2.1 1.7 2.3 2.3V. Others / unspecified 0.0 0.0 11.1 1.1Total Trade (I+II+III+IV+V) 100.0 100.0 100.0 100.0

DIRECTION OF IMPORTS OF INDIA'S FOREIGN TRADE - SHARE

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Trade PerformanceThere is sharp upward movement in the share of crude oil and petroleum products

Per cent Year / Commodity 1987-90 1990-00 2000-04 2004-08 2008-11I. Bulk Imports 40.5 39.2 39.3 43.1 44.1 A. Petroleum, Crude and Products 17.1 22.6 28.1 30.1 30.5 B. Bulk Consumption Goods 5.2 3.5 3.7 2.1 2.4 C. Other Bulk Items 18.2 13.1 7.5 10.8 11.2II. Non-Bulk Imports 59.5 60.8 60.7 56.9 55.9 A. Capital Goods 26.2 23.7 21.0 25.8 22.3 B. Mainly Export Related Items 17.8 16.7 16.3 10.7 12.0 C. Others 15.5 20.3 23.5 20.5 21.6 a. Gold and Silver - 14.4 8.4 7.9 9.4 (i) Gold - 12.7 7.7 7.5 8.9 (ii) Silver - 1.7 0.7 0.3 0.5IV. Total Imports 100.0 100.0 100.0 100.0 100.0

IMPORTS OF PRINCIPAL COMMODITIES -SHARE

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Key Messages Rupee in real terms has generally remained stable and close to its base level.

Volatility in rupee is largely explained by the movement in capital flows caused by global events.

Apart from level of exchange rate, exchange rate volatility also impact trade volumes.

Reserve Bank intervenes only to stem the volatility in exchange rate without any target or band.

World demand and growing openness of Indian economy are the key factors explaining steep rise in export volumes.

Given that exchange rate has moved both ways, it doesn’t explain the sustained rise in export and import volumes.

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Documents

1 Rajan Goyal, Director Department of Economic and Policy Research Reserve Bank of India World Trade Organisation, Geneva March 27, 2012 Exchange Rate