Why a stronger rupee doesn’t always hit export-oriented companies

ET Intelligence Group: Whenever the rupee starts strengthening against major currencies such as the dollar, the euro and the pound, it prompts equity traders to short sell stocks of export-driven companies. A general belief that triggers short-selling is that an appreciating home currency will adversely impact the country’s exports growth, thereby hurting revenues and profits of export-oriented companies. This, in turn, would lead to a fall in their stock prices over a period.

Does this belief hold true in reality? A trend of India’s export growth, plotted against the corresponding change in the average rupee-dollar rate over the past decade, does not offer convincing evidence of a consistently inverse relationship between exports growth and average annual currency fluctuations.


According to some economists, this is due to the fact that export growth depends more upon the global demand factors than on short-term currency fluctuations.

Currency fluctuations mask true export growth in the foreign currency. Thus, even if the dollar-denominated exports growth is low due to global slowdown, it would appear to be strong if the rupee depreciates against the dollar.

ETIG’s analysis shows that since FY09, which is after the financial crisis in some of the western economies, there has been no meaningful relationship between India’s annual export growth rate and the year-on-year change in the average rupee rate against the dollar.

“Export growth is largely driven by global demand. Between FY06 and FY09, global demand was firm and, hence, export growth was higher. It has, however, slowed since then, thereby impacting India’s export growth,” said Indranil Sengupta, India economist, DSP Merrill Lynch.

The analysis shows during the three years before the crisis between FY06 and FY09, the exchange rate seemed to share an inverse relationship with exports growth.

In FY07, exports growth accelerated to 27.9% from 25.4% in the prior year and the rupee depreciated by over 2% to an average of 45.3 against the dollar. The next fiscal, the rupee sharply appreciated to 40.2 against the dollar. Accordingly, the exports growth dampened to 8.2%.

In financial year 2009, the rupee plummeted to 45.9 and exports growth zoomed to 26.6%.

Beginning from FY10, however, exports growth was largely independent of the direction of the currency change. Dhananjay Sinha, head-research & strategist, Emkay Global Financial, says, “Currency change can be tracked to domestic economic gro- wth. A fast growing economy will attract more foreign capital, thereby strengthening the currency. Exports, on the other hand, would depend largely on the global demand scenario.”

A weaker rupee will support growth in exports when dollar-denominated growth is lower. For instance, India’s dollar-denominated exports grew at a CAGR of 8% between FY10 and FY14 to $470 billion, the period of slower global demand. But, since rupee fell sharply to 60.5 in FY14 from 47 in FY10, rupee-denominated growth in exports at Rs 28.4 lakh crore was higher at 21.5%.

Economists say looking at rupeedenominated export growth without considering dollar worth of exports will lead to wrong conclusions. This is because weaker rupee will tend to inflate export growth even though dollar-denominated growth stays low.