Rupee appreciation would adversely affect exports, which has been rising more than 20 per cent in the last 5 year, if there is no offsetting factor, according to economic think-tank National Council of Applied Economic & Research (NCAER).
Fiscal incentives, such as lower duties on capital goods imports or lower duties on other inputs, could improve the margins for exporters when the rupee appreciates, the national think tank said. The Indian currency has risen more than 10 per cent against the dollar in the past few months. If the appreciation implies lower rate of inflation, imports keep domestic prices in check then the positive impact on exports through this channel is widely felt.
Note of caution
However, many of the channels by which rupee rate affects exports from different sectors may not be uniform, NCAER has cautioned.  Lower duties on capital goods would have a greater impact on industries where the requirement of machinery for production is greater, while small and medium enterprises would not be benefited from rising domestic currency. The economic think further pointed out that another factor influencing export performance was global demand. Global trade volume, including services, increased by 9.2 per cent in 2006 compared to 7.4 per cent in the previous year. In most recent year, global demand conditions have had a positive impact on India’s exports, notwithstanding the appreciating exchange rate, NCAER said.
However, the economic think tank noted the impact of the strengthening rupee and various other offsetting measures may not have the same impact across all sectors.