India’s export performance has remained resilient despite the rupee occasionally being overvalued against the currencies of major trading partners, according to the Reserve Bank of India’s (RBI) latest monthly bulletin. The central bank asserted that its approach to managing the rupee’s exchange rate has not hindered the global competitiveness of Indian exports.
Rupee overvaluation and competitiveness
The RBI’s data revealed that the rupee’s 40-currency real effective exchange rate (REER)—a key measure of its competitiveness—was overvalued by 7.21 per cent at the end of October. This marks one of the highest levels in nearly six years.
Currency overvaluation generally poses a challenge for exporters, as it increases the cost of Indian goods in international markets, potentially reducing demand. However, the RBI emphasised that the sensitivity of India’s merchandise exports to fluctuations in real exchange rates has diminished over time.
A shift in export strategy
The RBI highlighted a strategic shift in India’s export growth model. Rather than relying on an undervalued currency to boost competitiveness, the focus has been on improving product quality, enhancing technological capabilities, and gaining market share through value-driven strategies.
“India’s efforts to grow exports are now geared towards achieving higher market share based on better quality and technological improvements, without the need for artificial props such as an undervalued exchange rate,” the RBI said.
Export growth Amid global challenges
India’s merchandise exports have grown at a compounded annual growth rate (CAGR) of 5.8 per cent since April 2018, surpassing the global average growth rate of 4 per cent, according to the bulletin.
This robust performance has occurred against a backdrop of volatile global economic conditions, including trade tensions, fluctuating commodity prices, and the impact of the COVID-19 pandemic.
Managing exchange rate volatility
The RBI has been active in currency markets to manage volatility, stepping in to stabilise the rupee during periods of excessive movement. Recent weeks have seen heightened intervention as the rupee came under pressure from portfolio outflows and a strengthening US dollar following political developments, including Donald Trump’s election victory in the United States.
While these interventions aim to prevent undue disruption, they have also led to temporary episodes of rupee overvaluation. The central bank, however, maintained that these interventions have been necessary to ensure macroeconomic stability without adversely affecting long-term export performance.
Policy implications
The RBI’s findings suggest that Indian exports are increasingly resilient to currency valuation changes, indicating a maturing economy with diversified strengths.
Economic experts believe this shift could reduce dependence on exchange rate manipulations and position India as a more stable trading partner. “The reduced sensitivity of exports to exchange rate changes reflects a structural transformation in India’s export basket, with a growing emphasis on high-value products and services,” said an economist.
Challenges ahead
Despite these positive trends, the overvaluation of the rupee could still pose risks to certain sectors reliant on price competitiveness. Industries like textiles, agriculture, and small-scale manufacturing remain more vulnerable to exchange rate fluctuations compared to technology and pharmaceutical exports, which rely on innovation and intellectual property advantages.
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Additionally, the global economic environment remains uncertain, with rising geopolitical tensions, inflationary pressures, and evolving trade dynamics requiring continuous policy adjustments.
RBI’s assurance
The RBI reassured stakeholders that its exchange rate policies are aligned with broader economic objectives, including export growth, inflation control, and financial stability.
“By balancing intervention with a focus on structural improvements, the RBI aims to maintain an environment conducive to sustainable export growth,” the bulletin stated.
India’s export sector has demonstrated resilience amid challenges posed by rupee overvaluation and global economic uncertainties. The shift towards a quality and technology-driven growth model reflects the country’s evolving trade strategies.
With the RBI actively managing currency volatility and fostering an export-friendly environment, India’s merchandise exports are expected to maintain their upward trajectory, reinforcing the nation’s position in global trade. However, continued vigilance and adaptive policies will be essential to navigate the complexities of the global economic landscape.
