Can rupee fall cushion tariff-hit exporters?

While the lingering tariff worries and demand from importers weighed down on rupee, sending it to a new record low of 88.47 intra-day on Thursday (closing at 88.44), the tariffs-hit exporters see a glimmer of hope in protecting their margins with the currency getting battered more, at least in the immediate short-term.

Falling rupee against the dollar makes exports cheaper in the US, which has increased tariffs on most Indian exports to 50%. Experts feel even if the depreciation in rupee may not fully compensate for the 25-30% price disadvantage, it is still some cushion for the exporters in the short-term.

This is a short-term gain as the same exporters pay higher for their inputs if imported, which adds to their cost, lowering price competitiveness. Typically, 1% appreciation of the rupee’s REER (real effective exchange rate, which is still not as bad as everyday exchange price against the dollar) value can boost India’s exports by 1.07% in the long run, according to an Exim Bank study.

While conventional wisdom suggests currency depreciation boosts exports by making goods more competitively priced in global markets in the short term, in the long-term a weaker rupee may not deliver the anticipated boost to exports primarily because of high import dependence of domestic manufacturing, mainly in export-oriented sectors, the bank says.