Exports and depreciation...

There has been a stable relationship between domestic currency depreciation and exports all over the world. Every time countries in the developed world are stuck in low growth period they try to give the growth a push by increasing money supply and depreciation. Even in INDIA the recent (2013) depreciation of the Indian currency to 68 pushed exports to 13%. Importers generally follow Nominal–Effective-Exchange-Rate to demand more for exports. The central bank tries to maintain NEER close to its REER or a little depreciated to increases demand for exports. But, it is not possible if the external conditions are not favorable. It is also constantly not possible because countries start complaining about trade deficit as with the US and China. China made its exports competitive by using a loose monetary policy, (but, now tightening)… NEER has a large value of inflation which is likely to go down with a consistent and credible monetary policy and REER will go up... The central bank wants to build a good foreign exchange reserve and it should also be done with a view to make exports competitive. Therefore, if our trading partners do not oppose, then the central bank must seize the opportunity to build reserves. Every-time the central bank will buy dollars it will depreciate the currency but more dollars will reduce our demand and Indian currency will start appreciating. And, all the central has to do is to push the Indian currency back to last depreciation every-time it reaches the REER…