Presentation on theme: "1 Rajan Goyal, Director Department of Economic and Policy Research Reserve Bank of India World Trade Organisation, Geneva March 27, 2012 Exchange Rate."— Presentation transcript:
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
2 Indias Export Import Growth vis-à-vis World Indias trade volumes have grown much faster than the world growth in the recent years.
3 Exchange Rate and Trade Flows Structure Exchange Rate Behaviour Sensitivity of Trade Flows Trade Performance
4 Exchange Rate and Trade Flows Exchange Rate Behaviour
5 Exchange Rate Behaviour Rupee in nominal terms steadily depreciated over the years.
6 Exchange Rate Behaviour Since 1993, Rupee in real terms has largely remained range bound
7 Exchange Rate Behaviour Current Account Balance doesnt explain the volatility in exchange rate
8 Exchange Rate Behaviour Significant co-movement between capital flows and exchange rate
9 Capital flows are potent factor explaining x rate volatility Exchange Rate Behaviour
10 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 doesnt have an exchange rate target or a band.
11 Exchange Rate Behaviour 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.
12 Exchange Rate and Trade Flows Sensitivity of Trade Flows
13 Sensitivity of Trade Flows Sensitivity of Trade Flows to Exchange Rate AuthorsPeriodExport ElasticityImport Elasticity Houthakker and Magee 1951-1966-0.23- T.N. Srinivasan1963-1994-0.53- Dipendara Sinha1960-1996-0.550.51 Dholakia, et al1980-1996-0.950.38* UNCTAD1970-2008-0.54- Reserve Bank of India – Annual Report 2009 1996-2009Trade balance improves by 0.7 per cent with 1 per cent depreciation in rupee in real terms. * Insignificant
14 Sensitivity of Trade Flows 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
15 Sensitivity of Trade Flows Growth in Export – Import and Variation in Real Effective Exchange Rate YearREERExportImport 1976-80-0.212.922.4 1981-85-18.104.22.168 1986-90-22.214.171.124 1991-95-4.012.310.2 1996-000.57.36.8 2001-050.618.825.0 2006-110.020.819.5 Given two way movement in exchange rate, sustained rise in trade volumes cant be explained solely in terms of exchange rate variations
16 Sensitivity of Trade Flows Trade Flows and Exchange Rate Volatility Impact on export and import prices and profitability of the trade sector
17 Exchange Rate and Trade Flows Trade Performance
18 Trade Performance Indias exports and imports grew faster than growth world trade after reforms
19 Trade Performance Opening up of Indias 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
21 Trade Performance Indian exports steadily diversified towards developing and emerging market economies
22 Trade Performance Indian exports slowly moving up the value chain imparting resilience.
23 Trade Performance Share of developing economies in total imports rising, largely on account of China
24 Trade Performance There is sharp upward movement in the share of crude oil and petroleum products
25 Exchange Rate and Trade Flows 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 doesnt explain the sustained rise in export and import volumes.