Increasing global uncertainties may impact exports
Context:
The Federation of Indian Export Organisations (FIEO) suggests that escalating geopolitical tensions could impact the country’s exports by affecting global demand.
Relevance:
GS-03 (Economy)
Highlights:
- India’s outbound shipments experienced a decline of 3.11% to $437 billion in 2023-24, partly due to uncertainties stemming from the Russia-Ukraine conflict.
- Imports also decreased by over 8% to $677.24 billion during the same period.
- FIEO Director General Ajay Sahai indicates that ongoing global uncertainties may lead to a slowdown in demand, potentially visible in first-quarter numbers, with softening freight rates signaling potential impact on demand ahead.
- Despite challenges, India’s rupee depreciated only about 1.3% during 2023-24 compared to currencies like the Chinese Yuan, Thai Baht, and Malaysian Ringgit, highlighting relative stability.
- Sahai urges the government to support exporters on the liquidity front, advocating for measures like interest subvention and continuation of the interest equalisation scheme, which received additional allocation until June 30. He proposes enhancing rates to 3% and 5% to further benefit exporters.
Foreign Exchange Rate:
- It refers to the price of domestic currency with respect to another currency.
- It can be either Fixed(Central Bank of the country decides) or Floating (Market mechanism of demand and supply).
REER:
- Real Effective Exchange Rate (REER) is a composite measure that evaluates a country’s currency against a basket of relevant currencies or an index.
- A rise in a nation’s REER suggests that its exports are becoming more costly, while imports are becoming more accessible.
- REER serves as an indicator of a country’s competitiveness in global trade with its trading partners.
- It provides insight into how a nation’s currency value compares to the average value of currencies used by its primary trading partners.
- When adjusted for domestic inflation, a country’s nominal effective exchange rate (NEER) aligns with its real effective exchange rate (REER).
NEER:
- NEER, or Nominal Effective Exchange Rate, represents the weighted geometric average of a country’s bilateral nominal exchange rates with other currencies.
- It signifies the domestic currency needed to buy foreign currency and gauges a nation’s competitiveness in the global forex market.
- This metric can be adjusted to consider the inflation rate of the home country compared to its trading partners, offering a comprehensive assessment of currency strength.
- Rather than focusing on individual currency links, NEER provides a consolidated view, comparing the local currency’s value to multiple currencies simultaneously.
- The Reserve Bank of India determines the NEER for the rupee against about 40 trading partners and six other currencies, with 2015-16 being adopted as the new base year due to structural changes in the Indian economy.
- The resulting figure, the Real Effective Exchange Rate (REER), takes into account both nominal exchange rates and inflation adjustments, offering a holistic perspective on currency competitiveness in the global market.
Significance of NEER and REER:
- NEER and REER are vital indicators in international economics, offering insights into a country’s currency value, trade competitiveness, and overall economic performance.
- These indicators allow comparisons with other nations, revealing competitive dynamics and real purchasing power.
- NEER is calculated using a specific formula based on a country’s relative trade balance, while REER evaluates average currency value considering inflation.
- In India, NEER represents a weighted average of the rupee against major trading partners’ currencies, while REER accounts for inflation and has fluctuated between 94.8 in 2009 and a peak of 118.3 in 2017.
