Rupee weakness does not translate into export gains
A sharp fall in the rupee over the past year and a half should, in theory, make Indian goods cheaper on the world market. HSBC’s recent study, however, finds that this has not happened for India’s mid‑tech exporters, which include textiles, footwear, plastics and metals.
The bank’s model, built on 11 years of quarterly data, shows that imports decline over time after a depreciation, but exports barely move. The expected “J‑curve” – a temporary widening of the trade deficit followed by a gradual improvement – is weak in India’s case. While goods exports grew from 12.1 % to 14.2 % of GDP, imports rose at a similar pace, keeping the trade deficit largely unchanged.
Higher EU tariffs erode price advantage
HSBC compared India’s average tariffs on mid‑tech goods in the European Union with those of Vietnam. India pays noticeably more, a gap that can offset any cost benefit from a weaker rupee. The disparity is far less pronounced for high‑tech goods, where India’s tariffs are closer to Vietnam’s.
In addition, India lacks the preferential access that Bangladesh and Pakistan enjoy under the EU’s Most‑Favoured‑Nation and Generalised System of Preferences regimes. Indian textile and leather lines face standard MFN duties of 9–12 %, whereas Bangladesh receives duty‑free, quota‑free entry.
An inverted duty structure at home
A second hurdle is the way India taxes imports. HSBC pulled customs codes that show raw materials often carry higher duties than the finished products made from them. For example, polyamide, an input for manufacturing, is taxed at 5.9 % while finished industrial robot parts are taxed at 5.6 %. Man‑made fibre ribbons are taxed at 15.2 %.
When the cost of an input is higher than the finished good, it becomes cheaper for firms to import the final product than to assemble it domestically. This discourages manufacturing of mid‑tech goods inside India.
High‑tech exports respond, mid‑tech does not
HSBC’s analysis splits goods exports into high‑tech, mid‑tech and low‑tech buckets. High‑tech items – machinery, electronics and transport equipment – show a clear pickup 2–3 quarters after the rupee weakens. Low‑tech goods, such as food and marine products, respond modestly. Mid‑tech exports, which account for nearly a third of core exports, remain essentially flat.
Labour‑intensive sectors like textiles and footwear, which are highly price‑sensitive, do not benefit from a weaker currency. HSBC’s earlier research in 2021 found a similar pattern, with mobile phones and pharmaceuticals gaining market share while textiles and agriculture stagnated.
Trade agreements as a potential lever
India has recently signed or brought into force several trade deals – with the EU (Jan‑26), UK (Jul‑26), Oman (Jun‑26), New Zealand (Apr‑26) and EFTA (Oct‑25). These agreements could narrow India’s tariff gap with peers such as Vietnam and help dismantle the inverted duty structure.
HSBC cautions that signing is only the first step. Implementation details, rules of origin, compliance costs and non‑tariff barriers will determine whether exporters actually use the preferences. The bank also stresses the need for stronger ties with East Asian partners, who supply many intermediate components.
What to watch next
- The pace at which India implements the new trade agreements and the extent to which exporters adopt the new preferences. - Any changes in India’s domestic tariff structure that could reduce the inverted duty problem. - The impact of the one‑off FCNR(B) deposit window closing on the RBI’s foreign‑exchange reserves and future capital inflows. - How AI and digital services might reshape demand for India’s outsourcing services in the coming years.
These developments will shape whether India can finally turn a weaker rupee into a competitive advantage for its mid‑tech sector.