Highs and Lows

Notwithstanding the plush surroundings of his office at Seepz-the exporter’s hub at Andheri in Mumbai-diamond exporter Nalin Mehta is f...

Notwithstanding the plush surroundings of his office at Seepz-the exporter’s hub at Andheri in Mumbai-diamond exporter Nalin Mehta is feeling distinctly uncomfortable. The continuous increase in the rupee’s strength against the dollar has made his earnings fall by over 5 per cent. “If this trend continuous we will be in deep trouble,” forecasts Mehta, who is also the president of the Diamond Merchants Association. “Our biggest cost advantage of cheap labour is being eroded by the rupee’s gains. Thailand and China are now eating into our market share,” says Mehta.

Like Mehta, thousands of exporters in the country are nervously tracking the the rupee’s forward march against the dollar. A single paise rise in the Indian currency makes a huge difference, as the dollar inputs when converted into rupees, pulls down the overall income of the exporters. “With China having an artificially fixed exchange rate, which it will maintain for another 18 months at the very least, India cannot afford to become uncompetitive purely on account of exchange rates,’’ says Anand Mahindra, CII president.

“I think the important thing to recognise is that the economy no longer faces an external constraint. From the time of the second Five Year Plan till the Eighth Plan, India has had to look abroad for external assistance. For aid, for IMF support, for high cost commercial debt. The country has paid a heavy price for this external dependence in the past. Over the past few years, an important policy objective for us has been to eliminate the balance of payments problems once and for all and to make crisis management less of a preoccupation for policy makers. I think we have done that. We can debate the correct exchange rate and the cost of keeping higher reserves. But there is no external payments constraint on growth any longer.”
— RBI Governor Dr Bimal Jalan

The only good news is that in spite of the hardening of the rupee, exports achieved a 11.06 per cent rise in the first quarter of this fiscal, with Indian merchandise exports crossing the $50 billion-mark for the first time in 2002-03. With growth pegged at 12 per cent, it is expected to surge towards the $60 billion mark this year.

Sector Sorrows

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The fledgling Indian software industry is also worried about the way the rupee has taken a 180 degree turn in the last three years. Analysts say for every single per cent gain in the rupee’s value, the profit after tax for Indian software companies falls by 2-4 per cent. This is because Indian software companies operate on a strong offshore model, with a major portion of their revenues generated in dollars, and almost 90 per cent of costs in the Indian currency. Many software companies, including big guns like Tata Consultancy, Infosys, and Wipro have already cut salaries, and other costs to keep their heads above water.

Says Nasscom president Kiran Karnik, “The appreciation of the rupee was not something we or anybody else had factored in. We have seen an appreciation of rupee relative to our forecast of almost 5 per cent. And that will affect exports, because we are talking growth in terms of the rupee. We don’t know by how much-a few percentage points, definitely.’’

Benefits Galore

Obviously, importers are ecstatic about the rise in the rupee’s value. Corporates sourcing their raw material from abroad are reaping a bonanza, as production costs experience a considerable dip. For example, many automobile companies like Ford, Fiat and Hyundai, who import top-end cars, have seen their costs coming down. Whether they pass the benefits of a falling rupee to the consumer or not is yet to be seen. Overall a smiling rupee, say analysts, is a good news for the economy as our imports are far higher than exports. Moreover, if oil prices go down India’s, oil import bill will come down substantially.

Next Change

Predicting the behaviour of the rupee is a tough job. Analysts, however, say that the RBI will intervene as and when required to curtail any wild fluctuation the currency may experience. The RBI has already bought and sold billions of dollars to keep the rupee’s volatility in check. Analysts also advice that exporters should switch to other currencies like the Euro to bypass the pressure of dealing with a weak dollar. Export promotion agencies like the Federation of Indian Exporters Association are already monitoring the changes in the exchange rate in the dollar and other currencies. It has asked its members that they should insist on their overseas buyers seeking invoices in Euro and other currencies.

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Analysts say thanks to the RBI, the rupee will remain in a band which will protect it from any external pressures, or volatility. While the Reserve Bank of India does its job, exporters like Mehta are sure to spend the next couple of months constantly tracking the rupee.

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