3.

How have appreciation and depreciation of Indian Rupee among other factors have
differential impact on export demand from India? Explain keeping in mind the
contributions of Cheung and Sengupta.
The relationship between exchange rate and exports is key research area in
international empirical economics as exports are vital for any countrys Gross
Domestic Product and also for maintaining the trade balance. Exports are a measure
of a countrys trade in the world market and if exports expand at a faster rate as
compared to imports the economy is said to be stable and progressive. Exchange rate
also plays an important role in countrys level of trade, which is critical to every free
market economy in the world. For this reason, exchange rates are one of the most
observed, studied and governmentally managed economic measures. There has been a
lot of debate and discussions in recent times due to rupee depreciation as compared to
dollar, with politicians and academicians worrying about impact on the net trade
balance. If currency of a country falls in comparison to other currencies then the
purchasing power of the country in global market reduces. It also makes the economy
unstable many a times leading to a fall in Foreign Investment.
The overall trade activity of a country is an aggregation of decisions of individual
firms. Hence in order to understand the effects of exchange rate changes on the trade
balance, it is important to analyze how exchange rate fluctuations affect the decisions
of a wide range of individual firms. Such analysis provides insights into
heterogeneous responses across firms to exchange rate movements and the related
policy implications of the central banks effort to manage and stabilize foreign
exchange variations.
A strong export sector could generate considerable spillovers to other sectors thereby
promoting overall economic growth. In the last decade or so, India witnessed strong
economic performance coupled with a strong export sector. Thus, it is quite
conceivable that a policy that promotes exports is conducive to economic growth.
Yin-Wong Cheunga and Sengupta (2012) study the real effective exchange rate
(REER) effects on the share of exports of Indian non-financial sector firms for the
period 20002010. They find out that there has been a strong and significant negative
impact from currency appreciation and currency volatility on Indian firms export
shares. They further add compared with those exporting goods, firms that export
services are more affected by exchange rate fluctuations. They conclude that exports
react to appreciations more rather than depreciations. In the study, On average, a firm
exports around 28% of its sales. This percentage goes up from 26% to almost 29%
between 2000 and 2005 but comes down to 27% in 2010, the post-crisis period. The
exports of goods and services display different patterns. While share of exports of
goods in total sales does not exhibit much fluctuation across years and is 25% on
average, services exports on the other hand registers an increase from 25% to 31%
between 2000 and 2005 and does not decline much by 2010.
Study reveals that indeed over the sample period a currency appreciation had a strong
and significant negative impact on Indian firms export shares. REER volatility was
also found to have a negative effect on a firms export decision. Further, there is
evidence that these Indian firms respond asymmetrically to exchange rate movement.
The REER change effect is likely to be driven by the negative appreciation effect but
not so much by the depreciation effect. Also, Indian firms with smaller export shares

were found to have a stronger response to both REER change and volatility.
Compared with those exporting goods, firms that export services seem to be more
affected by the exchange rate.
Empirical results indicate that currency appreciation and currency volatility in
general, have an adverse effect on Indian firms exports. Based on this circumstantial
evidence, it appears that if policy makers wish to promote exports, especially as the
Indian growth rate keeps faltering in recent times, they ought to focus their efforts on
stemming steady appreciation of the exchange rate and reducing volatility.