Rupee Below 85 Bodes Well For India's Export Competitiveness

The rupee's depreciation against the US dollar is positive for export competitiveness, and trade deficit in turn, according to analysts. The Indian rupee has declined over 2.24% in 2024, according to Bloomberg data, but not in line with its Asian peers.

The Indian unit remained one of the best performing in the region and relatively stable compared to peers, Bloomberg reported. Depreciation in a currency makes the country's export services and commodities cheaper in the international markets.

“The decline in the rupee, as far as trade competitiveness is concerned, is more than welcome. If you look at the real effective exchange rate, it is quite high. For October, it's around 107 level, and it'll increase further in November,” said Dhiraj Nim, economist and FX strategist at ANZ.

Real effective exchange rate, or REER is a weighted average of a nation's currency against an index or basket of 40 major currencies, and is used to measure trade capabilities. As International Monetary Fund puts it, higher REER means exports become expensive and imports get cheaper, eating into trade competitiveness.

“I think, form a competitive perspective, weaker rupee is very much required. Rupee staying strong on a REER basis is one of the reasons why India's trade deficit is widening.”

India's trade deficit has risen to record high of $37.84 billion in November as merchandise import soared. It touched an all–time high of $69.95 billion.

Sharp depreciation in the rupee's peer currencies due to dollar strength in the emerging market space will likely make a strong case even for the regulator to allow the depreciation. Otherwise, it'll make exports from India expensive compared to other countries in the space.

"If yuan weakens further due to further macroeconomic weaknesses in China and trade tensions with US, the Reserve Bank of India may become more tolerant of rupee depreciation to maintain export competitiveness and protect the interest of domestic manufacturers (safeguarding against dumping)," said Abhishek Goenka, founder and chief executive officer, IFA Global.

The Indian unit touched a record low of 85.09 against the US dollar on Thursday as the dollar index rose to over two–year high of 108.27. The greenback strengthened after Federal Reserve projected slower rate cuts for 2025.

The Indian currency closed at 85.08 a dollar on Thursday, after weakening 13 paise to a record closing low.