Exchange rate depreciation destroys growth: The examples of India and Brazil

Contrary to a widely held notion, exchange rate depreciation destroys growth, including in manufacturing industry. We look at two examples of countries where the exchange rate has depreciated sharply: India (the rupee has depreciated sharply since 2012) and Brazil (the real has depreciated sharply since 2014). In both cases, exchange rate depreciation has led to a slowdown in consumption, investment, credit, economywide employment growth, growth in industry and even in exports. Mechanisms that may explain this reaction to exchange rate depreciation include: The high real interest rates caused by the depreciation; The discouragement of foreign investment; Consumers’ loss of purchasing power due to imported inflation; The rise in the prices of capital goods and imported commodities; Capital outflows, due to the expectation of exchange rate depreciation, which reduce banks’ liquidity and credit supply.