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There are several analyst asserting that a strong rupee would dampen India's exports, for example below article. Given that circa 80% of indian exports are invoiced in USD, why a strong local currency would negatively impact the external sector? Is this because exporters revenues shrink when USD receipts are then exchanged into rupees.

https://www.bloomberg.com/news/articles/2020-10-26/-impossible-trinity-pushing-india-s-rbi-toward-stronger-rupee

"domestic consumption that makes nearly 60% of India’s gross domestic product in the doldrums, a sharply higher rupee would make it harder for exports to power a recovery."

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Stronger currency means that suddenly everything in India becomes more expensive for foreigners. When things become more expensive there will be less demand for Indian exports. For example, if the original exchange rate is 1 dollar for 100 rupees and one bread costs 100 rupees. Now if the rupee gets stronger and now the new exchange rate is 1 dollar for 50 rupees I need to now pay 2 dollars to get 100 rupee bread. If the bread is more expensive for foreigners they will buy less of it.

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  • $\begingroup$ I agree on the above assuming most indian exports were invoiced in rupees, but given that 80% are in USD, how does your example apply? $\endgroup$
    – Student
    Jun 5 at 20:12
  • $\begingroup$ there is lots of literature proving strong USD dampens emerging economies exports, for example: bis.org/publ/work819.pdf. "The message of our paper is that, paradoxically, a weaker currency against the dollar may actually serve to dampen trade volumes, rather than stimulate them. Our findings complement the findings in Casas et al. (2016) that when trade between third countries is invoiced in dollars, a stronger dollar dampens exports". bis.org/publ/qtrpdf/r_qt2012.pdf "Dollar appreciation dampens in particular investment growth and even export growth" $\endgroup$
    – Student
    Jun 5 at 20:15
  • $\begingroup$ "Invoiced in USD" is a poor description of the implied underlying mechanism. It is implied that the invoice is the result of a contract to, for example, sell 1 loaf of bread for 1 USD. In reality it is irrational to continue to use the same invoice after a large change in the relative value of currencies. $\endgroup$
    – H2ONaCl
    Jul 6 at 22:51
  • $\begingroup$ @Student The same thing still applies, the exchange just happens in a different place. The exporter buys bread for rupees and invoices in USD. Previously he could spend 100 rupees and invoice 1 USD, now he must spend 100 rupees and invoice 2 USD. $\endgroup$
    – user253751
    Jul 9 at 9:39

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