The Rupee Fell 10% and Exports Grew 0.9%: What the Exchange Rate Actually Does to India's Trade

The textbook is unambiguous: a weaker currency makes your exports cheaper abroad, so exports rise. India has just run that experiment at scale, and the result is awkward.

Over FY2025-26, the rupee went from about ₹85.5 to the dollar to ₹94.4 — a fall of roughly 10.4%. Merchandise exports over the same year grew 0.93%, from $437.70 billion to $441.78 billion. Strip out petroleum, and non-petroleum exports did better at +3.62%, but nothing in that range resembles the boost a 10% price advantage is supposed to buy. The rupee did the work; the exports did not follow.

This is not a one-year fluke. Stretch the window back four years and the divergence is the whole picture:

Three things break the simple story, and all three are measurable.

First, India's exports are built out of imports. The India Exim Bank's Occasional Paper No. 228 (2025) puts the import intensity of raw material for Indian manufacturing at 33.4% in FY2022-23 — a third of every rupee of raw material is bought abroad. More striking: 56.2% of India's merchandise exports come from industries whose import intensity is above that 33.4% average. When the rupee falls, those firms' input bills rise in lockstep with their revenue. The depreciation gives with one hand and takes with the other. Note also that manufacturing's overall export orientation is just 6.5% of sales — most Indian factories sell at home, so the currency is a second-order variable for them.

Second, the dollar prices the trade, not the rupee. Under what economists call the Dominant Currency Paradigm, most Indian exports are invoiced in US dollars regardless of who is buying. The Exim Bank papers cite the Gopinath–Boz–Plagborg-Møller estimates: a 10% depreciation against the dollar raises a country's import prices in local currency by 7.8%, while a 10% depreciation against its actual trading partners raises them by only 1.6%. Pass-through is roughly 0.78 for the dollar and 0.16 for everything else. If the invoice is written in dollars, a falling rupee does not lower the price the foreign buyer sees. It just changes what the Indian exporter books at home. The same research finds a 1% dollar appreciation against all other currencies predicts a 0.6% fall in trade volumes among the rest of the world within a year — the dollar's level matters more to world trade than any single bilateral rate.

Third, demand swamps price. This is the finding that should reorder the debate. In the Exim Bank's own model (quarterly data 2005 Q1–2021 Q3, ARDL bounds-testing), the long-run elasticity of India's real exports to world GDP is 4.15 — significant at 1%. The exchange-rate elasticity is roughly a quarter of that, and only significant at 5%. In the short run, the exchange-rate terms are not statistically significant at all. What sells Indian goods abroad is foreign customers having money, not Indian goods being marked down.

Here is the part that deserves more attention than it has received. India Exim Bank has published two studies on this question using the same statistical method, and they reach opposite conclusions.

This is not a sign-convention artefact. The 2018 paper quotes the rate in rupees per unit of foreign currency, so its positive coefficient genuinely means depreciation helps; the 2025 paper uses an index where a rise means appreciation, so its positive coefficient genuinely means appreciation helps. The two are opposed in economic content. The 2025 paper lists its predecessor in its own back-matter and never reconciles with it.

The 2025 paper's explanation for its counterintuitive result is the import-intensity channel: a stronger rupee cheapens imported inputs, cuts production costs, and improves competitiveness on net. That is a plausible mechanism — but the model contains no input-cost variable, so it is a rationalisation offered after the fact rather than a tested pathway.

The aggregate hides enormous variation. Sorting India's ten largest export industries by export orientation and import intensity produces four very different currency exposures:

The Exim Bank also correlates each sector's exports against the rupee over 2014–2023. Electronics (0.93), chemicals (0.92) and machinery (0.92) move most with the currency. But three sectors show the wrong sign — leather (−0.67), gems & jewellery (−0.51) and textiles (−0.24) — meaning their exports have historically done better when the rupee was stronger. For gems and jewellery the reason is structural: more than two-thirds of its raw material is imported, so cheaper gold and rough stones widen value-addition margins.

Only one sector gets the full textbook benefit — depreciation improving both exports and the trade balance — and that is food and agro-based products, which imports just 8.7% of its raw material. It is India's genuinely home-grown export.

Caveat worth stating plainly: those correlations are simple bivariate coefficients on ten annual observations, with no controls and no significance tests reported. At n=10 the 5% threshold is around |r| = 0.63, so the textiles (−0.24) and transport equipment (0.31) readings are statistically indistinguishable from zero. The rupee also fell almost monotonically over 2014–2023, so much of what these correlations capture is a shared trend rather than causation. Use them for ranking, not as elasticities.

The RBI's stated doctrine has been consistent since the rupee was floated in March 1993, and it is deliberately modest. In its own words to the BIS, the Bank intervenes “occasionally, only for maintaining orderly conditions in the market by curbing excessive volatility,” and does so “without targeting any specific exchange rate.” It describes the approach as leaning against the wind, and pointedly notes that India “has never resorted to any kind of competitive depreciation to gain export advantage.”

The mechanics are less well known than the doctrine:

The Market Stabilisation Scheme deserves a note, because it exists to work around a legal constraint most people do not know about. The RBI Act bars the Bank from issuing securities in its own name and from borrowing beyond its paid-up capital of ₹5 crore. Unlike the central banks of Mexico, Malaysia, Korea or Poland, it cannot issue central-bank bills to soak up liquidity. By the early 2000s, sustained capital inflows meant the RBI was literally running out of government paper to sell. The MSS was the fix: the Government issues the securities, the proceeds go into a frozen account at the RBI that the Government may not spend, and the interest cost appears explicitly in the Union Budget. It is an unusually honest arrangement — the fiscal cost of managing the currency is on the books rather than buried in the central bank's accounts.

Managing the rate is not free. Because reserves earn foreign interest rates while the sterilisation bonds pay Indian ones, holding reserves is a negative-carry proposition that drags the RBI's transferable surplus. By 2003-04, foreign sources already generated 63.6% of the Bank's income while foreign assets were an even larger share of its balance sheet — the gap is the carry cost. And the deeper structural point, in the RBI's own framing, is that India's reserves are not “earned” through a current-account surplus but “borrowed” from capital inflows, and “may be required to be returned should the capital flow reverse.”

Not entirely, at least historically. Patnaik and Shah tested India's de facto regime against the official “market-determined” description using a Frankel-Wei regression over April 1993 to December 2006. Their result: the dollar's coefficient is 0.956 with a t-statistic of 88.2, while the yen (0.029), euro (0.052) and pound (0.021) are statistically detectable but economically trivial. Daily volatility tells the same story — the rupee against the dollar sat at 0.291, roughly half of every other currency pair in their table, while the rupee against the pound, euro and yen looked like perfectly ordinary cross-rates.

Their conclusion was blunt: India ran a de facto dollar peg, and reserve accumulation was the mechanical residue of maintaining it rather than a deliberate insurance policy. Their measured flexibility index for India was 0.03 — and, awkwardly, the probability that the rupee barely moved over a month rose from 84.5% before the 1993 reform to 93.4% after it. The float made the currency stickier, not freer.

That window closes in 2006, and the years since have included genuinely large two-way moves — the rupee fell 12.4% in 2011-12 and has fallen sharply again through FY2025-26 — so the peg finding should not be read forward mechanically. But it establishes the useful habit: judge a currency regime by what the data does, not by what the central bank calls it.

The RBI's own honest admission in the same BIS paper is that the real exchange rate is a poor operational guide. In December 2012 the rupee was simultaneously overvalued on the 6-currency REER (104.71) and undervalued on the 36-currency REER (90.74). Its verdict: “the REER is not a very effective tool in deciding on the timing of interventions.” The measure everyone quotes is directionally useful and operationally close to useless.

One correction is worth making explicitly, because the two institutions get conflated. Export-import banks do not regulate exchange rates. No Exim bank anywhere sets, defends, or intervenes in a currency. That power sits with the central bank and, in India's case, with the RBI under the Foreign Exchange Management Act, 1999, which replaced the restrictive FERA regime and moved the country from exchange control to exchange management.

India Exim Bank, established under the Export-Import Bank of India Act, 1981, is a credit institution. It works on the other side of the same problem — not by changing the price of the currency, but by insulating exporters from it and financing the buyer. Its instruments are:

The scale is real: India Exim Bank sanctioned fresh loans of about ₹1.4 lakh crore in FY2024-25, with the loan portfolio growing 18%. That is the practical answer to a volatile rupee — not trying to fix the price, but making sure the exporter does not have to care what the price is on any given morning. The Exim Bank's own sectoral advice runs the same way: trade-intensive firms should hedge and diversify input suppliers; import-intensive firms should seek fixed-price arrangements with suppliers.