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June 21, 2007 12:12 IST
The rupee appreciation would affect exports, which has been rising more than 20 per cent in the last 5 year, if there is no offsetting factor, National Council of Applied Economic Research said.
"The robust growth in exports that was witnessed in the past five years may yet be adversely affected by the strong Rupee if the other offsetting factors are absent," NCAER said in its monthly monitor.
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, it 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. However, many of the channels by which the rupee rate affects exports from different sectors may not be uniform, it said.
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.
NCAER said 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 the most recent year, global demand conditions have had a positive impact on Indias exports, notwithstanding the appreciating exchange rate, it said.
However, it said, the impact of the strengthening rupee and various other offsetting measures may not have the same impact across all sectors.
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