How Does Inflation Affect Exports in India?

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Globalisation, liberalisation and economic growth are not the only driving factors that boost the export markets for the Indian economy. Apart from them, several other equally vital macroeconomic factors enhance Indian exports. These prominent factors are inflation as well as the exchange rate.

However, there is a direct and negative relation between inflation and exports. If you are wondering about the effects of inflation on exports, keep reading the article to know more.

Exports are a vital part of international trade wherein goods and services produced in any country are sold to cross-border buyers of another country. Generally, countries prefer importing (buying) things they lack while exporting (selling) things they process in excess.

In the globalised era, seeking buyers from external markets has emerged as a method to earn greater revenue instead of restricting business within borders. However, as exports involve cross-border trade and foreign currencies, it needs to fulfil a lot of formalities.

Now, as stated above, since the prices of goods increases in the economy, the demand for those products or services will be lesser in other countries, resulting in lessening exports and vice versa. Although, whether inflation will positively or negatively impact exports will depend on the degree of inflation.

In fact, a moderate or minimal inflation rate may not impact export negatively, while a higher inflation rate is more likely to impact export adversely.

Simply put, India is a developing nation. Many raw materials and ingredients are not produced in this country. This makes industrialists and businesses rely on overseas countries to procure such raw materials and to produce the end product.

Now, in the event the value of the Dollar increases against the Rupee, the importers will have no other option but to pay more Indian money for their imports.

Eventually, this will impact the cost of producing the final product, thereby making the end product costlier. Costlier merchandise will have reduced demand in foreign and also harm the nation’s export business as well as the flow of earnings.

Inflation and Exchange Rate

This will exhibit a similar impact on the exchange rate too. An exchange rate defines a price that concludes the earned amount of rupees against each export dollar. It is a determining factor of price competitiveness in the global market. Exchange rates appreciate following the appreciation of the domestic currency and contrariwise.

Thereby, export is supposed to decrease in the event of an increase in the exchange rate because an overseas buyer tends to buy fewer goods or services from another foreign seller using their currency.

Inflation and Trade Deficit

In economics, the term inflation is used as a measuring tool to evaluate the money supply in the market. For instance, if the money supply rises, buyers will have more money and demand more goods and services, eventually leading to price hikes.

Conversely, when the supply of money remains low, the market will experience decreased demand for merchandise and services, which results in deflation. Inflation is the scenario when a country's import volume exceeds its exports for a particular period. It is known as a negative balance of trade.

Inflation and Interest Rates

Inflation and interest rates are other factors that affect exports mainly through their effect on the exchange rate. With higher inflation, the interest rate will also tend to increase. Higher interest rates appreciate the currency since overseas investors look for higher returns, thereby increasing their demand towards the currency.

By the channel of an exchange rate, exports are diminished as they become costlier, whereas imports rise since they become economical.

Inflation increases the price of goods and services in the international market by a big margin. Export of goods will appreciate only if demand for domestic export in foreign countries becomes inflexible.

So, if the inflation rate remains moderate, it may not significantly impact export. However, if it rises to a high level, it will grossly affect exports by diminishing them significantly.

So, these are the effects of inflation on exports. Theoretically, both inflation and export are inversely related to each other. Hence, inflation cause a reduction in export owing to the increased price of products and services in the international market.