Informist, Wednesday, Nov. 20, 2024

NEW DELHI – The sensitivity of India's merchandise exports to changes in real exchange rate seems to have declined over the years, according to a paper by the Reserve Bank of India staff. This reflects diversification across markets and export items, rising technology intensity and higher value addition in manufacturing exports, increasing participation in global supply chains, and improving productivity and competitiveness, it said.

"Thus, the emphasis in India's export effort is shifting towards expanding market share on the basis of improvements in quality and cutting edge technology without the need for artificial props such as from an undervalued exchange rate," the RBI's monthly State of the Economy article - which includes Deputy Governor Michael Patra as one of its co-authors - said Wednesday. The views expressed in the article do not reflect the central bank's official stance.

The report further said that the inference by some commentators that the exchange rate policy stance has significantly impacted India’s export competitiveness is not substantiated by evidence. This is at a time when the central bank's stranglehold over the rupee's exchange rate has visibly tightened in the last one year, with even moderate fluctuations seemingly being nipped in the bud.

"In the recent period, there has been some commentary in the media on the INR's (Indian rupee) exchange rate policy. It is worthwhile to address the issue brought out therein, but free of emotion, discontent or pre-committed theoretical positions that remain untested with actual facts," it said.

Echoing the central bank's oft repeated statements, the paper said that the RBI's interventions in the foreign exchange market are intended to ensure that the market is liquid and deep, and functioning in an orderly manner. "As a result, volatility of the INR (Indian rupee) – as extracted from options prices as well as GARCH28 (Generalised autoregressive conditional heteroscedasticity) estimates and 30 days rolling standard deviations – has been steadily declining. This has had beneficial effects in terms of anchoring financial stability," it said.

It added that India's foreign exchange reserves are used to shore up investors' confidence, especially when there are large capital outflows, and to mitigate financial stability risks, all of which could have real sector implications. India's foreign exchange reserves fell to a near three-month low of $675.65 billion in the week ended Nov. 8, primarily due to the central bank's active dollar sales intervention in the domestic spot market.

The paper further said that the central bank's forex market interventions need to be adjusted for the economy's size to draw a fair conclusion. Following this principle, it is found that the RBI's net interventions to GDP averaged 1.6% during February to October 2022, during the Russia-Ukraine war-induced volatility, as against 1.5% during the earlier crises, which were of much lower magnitude, it said. End

US$1 = INR 84.42

Reported by Pratiksha

Edited by Avishek Dutta

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