RBI has been doing less trading on the currency market. Without these artificial forces in play, the INR has appreciated. Shankar Acharya wrote an eloquent article in Business Standard saying this is all wrong, that we should just go back to the happy days of the policy framework of the mid-1990s. He says that the INR is overvalued and that does fundamental damage to India's exports growth and ultimately India's GDP growth.
I disagree. My main point is that there is a lot going on in exports growth, and that the negative impact of INR appreciation and high local inflation has been swamped by other factors which have helped enable high export growth. The empirical evidence supports the claim that there is no simple and sharp negative impact flowing from INR appreciation to exports growth.
TCA Srinivasa Raghavan helped me to sharpen the argument. Let's start with an AR model for monthly yoy exports growth data, which just captures the time-series structure of the series. I use data from March 1992 onwards. This works out to an AR(14) model. With this in hand, suppose you introduce contemporaneous and past yoy changes of the INR/USD. There's absolutely nothing there. Going up to 6 lags (or beyond) gives nothing. Not a single coefficient is significant. This result holds whether you do the full dataset (from March 1992 onwards) or if you focus on the latest 100 points which is 8.33 years.
In other words, after controlling for the time-series structure of the exports growth series, yoy INR/USD fluctuations don't seem to matter in explaining the fluctuations of yoy exports growth.
Once again, my claim is not that prices don't matter. It's just that the explanatory power of currency fluctuations is small at best, and that the main story of exports growth is elsewhere. To say this differently, standard measures of REER are highly ineffective.