1% rate hike knocks off 4.5% export growth

ANALYST'S VIEW

The extent of the currency effects is relatively small compared with those of other variables, such as the export credit rate or the global growth scenario.

The relative appreciation of the rupee with respect to India's export markets only operates with a long lag on the country's merchandise exports. It usually takes two-and-a-half years for the effects to be felt.

The impact of the appreciation of the rupee on export competitors operates with lags up to 13 quarters or just over a three-year period. 

SLOWDOWN Causes for slowdown in exports (%)
Variables	Relative contribution
Export credit	31
Growth in major export destinations	64
Relative appreciation/ depreciation	0.2
Relative appreciation/ depreciation	4.3
Source: HSBC estimates

This is a couple of quarters more than the impact of the relative appreciation of the domestic currency on export competitors. Beyond the lags resulting from internal adjustments and volume effects, this could reflect the additional time taken to identify a suitable alternative source of imports.

Global growth has both a one-quarter lag and a coincidental impact on Indian exports. This supports the premise of stronger growth in trading partners, resulting in higher demand for the country's exports.

What is interesting is the quick and more than proportionate response of Indian exports to the growth in these destinations. It implies that for every percentage point improvement in global growth, there is about 1.5 per cent improvement in Indian exports in the same quarter and about 1.3 per cent improvement in exports with a one quarter lag.

Such high elasticities probably reflect the fact that necessities, such as food, do not form the major chunk of the country's exports, whereas luxuries, such as gems and jewellery, and investment goods, such as machinery and instruments, transport equipment goods, etc, are more significant.

The overall impact from global growth of about 2.8 per cent is clearly quite a lot larger than about 0.7 per cent total impact resulting from an appreciating currency, which in any case, takes more than two years to come through.

Having said that, we need to bear in mind that despite a smaller coefficient, the overall impact of the exchange rate could still be relatively large, given that it is often more volatile than overall growth rates in major trading destinations.

The export credit variable has the biggest impact, according to the model, with every percentage point rise knocking a sizeable 4.5 per cent from the export growth with a one period lag.

"" Robert Prior-Wandesforde Economist, The Hongkong and Shanghai Banking Corporation, Singapore