India’s exports in March 2017 grew at its fastest pace in 36 months, registering a growth of 27.59%. Exports grew for the 6th consecutive month. Growth in exports bode well for India’s economic growth as it indicates overall improvement in global aggregate demand.
The INR has strengthened to 18 months highs against the USD on the back of global investor confidence in the Indian economy. Read our note on INR to Strengthen to Rs 60 to the USD. INR has gained over 6% from lows seen last year.
Given INR strength, the inevitable concerns arise on whether the rise will affect India’s exports if the currency is not competitive relative to other export driven economies currencies. RBI too does not appreciate a singular direction of the INR and is intervening in the markets to slow down the pace of appreciation. Read our weekly currency report on RBI to Buy USD.
The question is does India’s exports depend on a weak INR? Historical data proves otherwise as seen in Chart 1. India’s exports have grown rapidly at times when the INR has strengthened and have in fact fallen when INR has weakened.
India’s export growth is largely dependent on the strength of the global economy and with the global economy showing strength over the last six months, exports too have risen in conjunction. Read our report on Global Economy Showing Sustained Growth.
The worry factors of INR strength is more towards the software outsourcing sector, which is facing weakness due to digitization. Weakness in growth coupled with a strengthening INR hurts profitability of the IT companies. IT sector has underperformed the BSE Sensex on growth worries. Chart 2. India’s pharma sector too is facing headwinds due to quality issues and a strong INR will hurt profitability for the export driven stocks. Pharma too has underperformed the Sensex on the back of growth issues. Chart 3.
While INR strength is unlikely to hurt overall export growth, the softening in IT and Pharma sectors would be a worry. It remains to be seen if other sectors emerge as top exporters, negating the weakness in IT and Pharma.