Can exports growth happen without exchange rate depreciation?
But the bigger issue is that exchange rates have much less to do with exports growth than most people seem to assume. The `real effective exchange rate’ reflects the average of rupee fluctuations against all currencies, adjusted for relative inflation. Figure 1 superposes the Indian REER time series against the Indian merchandise exports time series. From 1994 onwards, the REER has fluctuated between 85 and 110. Over this period, merchandise exports have risen from $2 billion a month to $15 billion a month. If one believed that the REER was central to export promotion, then the exports growth which has been achieved is astonishing, considering that no big REER depreciation has taken place. What is going on? The key insight is that exports growth comes from two things. First, world trade grows. When world trade does well, Indian exports do well, and vice versa. This is independent of exchange rates. Second, India has been learning to export. Gradually, firms are learning how to produce
