Impact Of Rupee Appreciation

Impact Of Rupee Appreciation 41 42 43 44 45

Rupee Hits Nine Year High

Table of Contents S.No.

Topic

Page No.

1

Introduction

3

2

Causes

4

3

Impact  On Exporters

6

 On Importers

8

 Other Impacts

8

4

Role of govt.

9

5

Flaws in govt.’s action

10

6

Conclusion

13

7

Bibliography

14

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Rupee Hits Nine Year High

Introduction From 2003-07 Indian market is booming at leap & bound manner, today after China India is 2nd fastest growing economy of the world with the growth rate of 9.4% in the first quarter. It’s a “trillion dollar country surpassed Russia & become world’s 10th largest economy, today (till 30th march, 2007) Indian forex reserve is around $200 bn. From july 2006- to sep 2007 the value of rupee is highly appreciated by 13.9% from Rs.46 to Rs 39.58. There is a big dilemma in everyone that does it will adversely effect our economic growth or it’s an indicator of Indian growing economy. There are so many research are going on this issue and there are two school of thoughts are there one: some believes that it’s a symbol of booming economy & its beneficial for our economic growth rate while another school of thought: it’s a impact of recession in US economy and will adversely effect our country’s economy.

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Rupee Hits Nine Year High

Causes  Huge Foreign investment in our country: Nokia, Elcoteq, LG, Motorola, Samsung are going to set up mobile handset plants. Dell Computers, Flextronics are setting up plants for PCs & laptops to match growing demand in the country & nearby countries. Samsung, Taiwan based Foxconn are setting up their plants in India and many more investments are in pipeline. (Refer: business world 6th aug 2007).  Initially rupee strengthened (3.52% march) on the back of the stronger Asian markets. (Refer : “ External Commercial Borrowings”, Treasury Management: May2007).  FII inflow: The rupee's gains have been mostly on account of continued capital inflows into the country, while the central bank’s sterilisation programme has helped fuel inflation. The country’s foreign exchange reserve is surged by $11.871 billion to touch $247.762 billion for the week ended September 28, 2007. The rise in reserves is easily an all-time record. (Refer: “Foreign Reserves Swelled By $11.9b”; Business Line, Oct 5). (over $3.9bn net inflows in the first 10 months of this Fiscal). In India there is a Current Account surplus for the first time in years due to Increased Merchandise exports and Invisible, resulted in supplies of Foreign Currency going up sharply and thereby creating demand for Rupee in FOREX Market.

(Refer: “Report On Foreign Exchange Reserves”, www.rbi.org.in). Page 4 of 14

Rupee Hits Nine Year High

 ECB borrowings: The External Commercial Borrowings (ECB) are foreign currency borrowings by Indian companies outside India. ECB provides medium to long term funds, bridging the gap between domestic savings and capital expenditure. ECB are permitted as an additional source of finance to Indian companies for financing import of capital goods, new projects, and modernization etc especially of SMEs. Since ECB carries the benefits of low cost of capital (LIBOR rates 1.3% to 6.3% as compared to 10-14% of Indian Public Sector banks), international pricing flexible instruments; has flooded foreign cash inflows in the country especially in the last months the ECB is 16.1% of the FOREX. Note: More attractive ECB even at unchanged interest rate differential. Even if the rupee can fall over overvalued, then the balance would tie up the other way. (Refer : “ External Commercial Borrowings”, Treasury Management: May2007). If the RBI wants to limit the appreciation of the rupee in the interest of exporters, it has to discourage ECB. Given the higher and rising interest rates in India, it is difficult to do so, unless the RBI puts more restrictions on ECB. But the RBI is unlikely to do this. (Refer: “Rising Rupee: Causes & Consequences”; Business Line, june15)  Slowdown of US economy: The dollar has lost about 5% against the pound and the euro this year. From India’s perspective, a decline in the dollar against the major currencies invariably means appreciation for the rupee. (Source: ‘Dollar Under Siege’; Business Standard , Date 23rd July 2007, page 13)  US Fed Reserve rate was cut by 50 basis points there by making the interest rate more attractive in the emerging markets especially Indian markets, which lured inflows there by appreciating the rupee. (Source: Business Standard, ‘ Rupee jumps on Fed Reserve rate cut, liquidity improves’ , date: 20th sep 2007).

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Rupee Hits Nine Year High

Impact of rupee appreciation From Exporters Point of View: Most developing countries have economies based largely on exports that are competitive in global markets because of low prices. When those countries' currency gains value, they are no longer able to offer exports to the global market at the same low prices that they planned to. This may cause importers to look elsewhere to country's with lower valued currency and thus prices or to order less than they would have otherwise.  Around 30% of share of exports in economy which will surely be affected at one hand. According to commerce ministry report (Oct, 2006) around 86% of export & 89% import deals invoiced in USD. So, in this case exports houses will suffer badly.  Today IT industry is growing by 31%, but major operations around 80-85% are outsourced from US based companies, so this event hampers its growth by few points but if it will continue for long time then companies like INFOSYS will be in trap because its 90& operations are for US based companies.  Hotel companies (Taj Gvk, ITC hotels etc) are set to loose as their 50% of revenues are in dollar terms. (Source: ‘Rupee Blisters slow export growth to 14% Business Standard: date 2nd Aug 2007, page 13).  Silk industry had to bear the maximum burnt as it was 71% sensitive to the hardening of the currency, cotton and jute were less sensitive to the rising rupee at 23% and 18% respectively and IT sector companies were up to 90% sensitive to rupee appreciation. China is the main competitor of Indian textiles in the global market. (source: Business Standard:’ Strong rupee hits textiles sectors’, Date: 31st july 2007).  Manufacturing industry: It is also facing the same problem because major chunk of the customers are US Companies and due to that this industry is also suffering but on other side it have profit also because 70% or above raw material is imported in USD which gives relief to the company but in this around 11,000 workers lost their job due to this event.

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Rupee Hits Nine Year High

(Refer: ‘Strong Rupee Hits Textile Sector’, Business Standard, 1st Aug 2007)

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Rupee Hits Nine Year High

From importer’s point of view:  Oil companies are highly benefitted, more than 80% crude oil import gulf and other counties. Acc to IOC manager: “for every Rs1 appreciation crude oil price dip by 2%”.  Recent acquisitions made by Indian companies: o UB Group- whyte & Mackay. o TATA steel – Corus are Benefitted.  International borrowing (from US Banks) by Indian Companies.  Beneficial for country external debts because 10% increase in Rs reduce the debt amount by 10%.  Consumer electronic goods, imported apparels etc will be available at cheaper price.  The sectors like gems and jewellery were not much affected as India’s competitor Thailand was also hurt by rising currency. (source: Business Standard:’ Strong rupee hits textiles sectors’, Date: 31st july 2007) According to an industry analyst - “Every 10 paisa appreciation in rupee negates one dollar upward movement in international prices” Other Impacts:  Small exporters are hit badly by rupee appreciation as they have limited access to hedging products.  Companies like Hyundai plans to reduce the dollar-denominated exports of its cars to counter the appreciation of the rupee against dollar. (Refer: “Re: Rise Hyundai plans denominated exports”, Business Line, Oct 6th).  Rupee appreciation has helped control inflation. The appreciation of the rupee has dampening effect on inflation. ( C.Rangarajan, Chairman EAC)

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Rupee Hits Nine Year High

Role Of Govt. Govt. initiative to protect exporters.  Tax incentives, interest reductions, reduction in service taxes. The interest on exportis reduced to below five per cent and allowing conversion of shipping bills. (Refer: FICCI publications. “ FICCI reaction on Rupee Appreciation” sep 3 rd 2007).

 Export duty reduction & waive custom duty  Forward contracts with customers to protect exporter’s interest.  Purchase of dollars from the markets by RBI to stem the rise of rupee appreciation by curbing the liquidity; however is a short term remedy. (Source: Business standard: 26th sep 2007 “ RBI intervention checks Re”) Other Measures:  Establishment of various councils such as Engineering Export Promotion Council (EEPC) in which DEPB (Duty Entitlement Passbook) Scheme has been launched in which duty drawback rates had been increased by 1.5% for engineering items.  Exchange stabilization scheme has been launched which can compensate a portion of the loss suffered by exporters on account of rupee appreciation. (Refer: “Exporters seek relief as rupee appreciates”, June 23rd Business Line) Page 9 of 14

Rupee Hits Nine Year High

Flaws in the Govt./ RBI measures to control rupee acceleration I.

Weaker Currency is not a cure at all

 One School of Thoughts: Policy makers wants a weaker rupee so that India’s competitiveness will rise. They do not think that it is normal for the rupee to appreciate as a result of greater foreign exchange inflows into the economy. This absurdity will continue until policy-makers turn their attention to raising productivity of governance and the competitiveness of the aggregate supply chain. It is a pity that many of India’s exporters have chosen to rely on a weak rupee to sustain their competitiveness. They are now deeply disturbed. Their future ‘rupee profitability’ is in jeopardy. They are horrified that the Reserve Bank of India (RBI) has allowed the rupee to strengthen. They are nervous that the RBI may have given up its policy of ‘weakening through intervention’ in the foreign exchange markets. What they want is a weaker rupee so that India’s export competitiveness will rise. They want more exports to lead to greater foreign exchange inflows. They want these inflows to rise so that India can fund its imports. But the rupee will inevitably strengthen if inflows of foreign exchange exceed outflows. They will then argue that the strong rupee is a threat to India’s competitiveness. There will be more sops.  Other School of thoughts (Modern Approach) or Productivity & Competitiveness: The reason for the above schools of thoughts is simple ad straight forward, that the sops turns unprofitable exports profitable. But latest approach states that Competitiveness Page 10 of 14

Rupee Hits Nine Year High

stems from productivity. National competitiveness and economic welfare are determined primarily by productivity in both the traded and non-traded sectors. It is important to emphasise that governance is a non-traded sector. Productivity is the amount of output produced relative to the amount of resources (human effort, and physical and technological assets) that go into the production. It is quantitative. It does not depend on the monetary value of the output relative to the inputs. Productivity and competitiveness improve when the quantity of output increases relative to the quantity of input. By contrast, profitability is the value of output relative to the cost of inputs used. Profitability improves when the cost of inputs used is reduced relative to the value of output. Sops are aimed at reducing the cost of inputs without reducing the quantity of inputs. It is no surprise that superficial commentators love sops. Profitability also improves when the value of output is raised. The weak rupee is aimed at raising the rupee value of output without raising the quantity. It is no surprise once again that the merits of the weak rupee are presented most assertively by those who have no clue about making the Indian economy more productive and more competitive (Refer: “ Weaker Rupee is not the cure at all”, Business line, July 19) II.

Change In Monetary Policy (CRR, Repo, Reverse Repo rate): Recently govt. has hiked the CRR to 7% , repo rate to 7.75% to curb the inflation rate(5.5%) , which increased the floating interest rate and its adversely affects many of the businesses like real estate and exporters too. According to manufacturing Industry analyst, SMEs share in exports is 30-35% , a huge part and these SMEs work on credit basis they took loan from banks sometime at fixed rate & floating rate too so this RBI announcement is also going to affect them. It’s a cyclic process each change affects the whole economy of country.

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Rupee Hits Nine Year High

RBI Monetary Policy (CRR, Repo rate) Increased

Country Growth Rate Affected

Growth rate affected

High Interest Rate Affects Loan

Business Affected Like Real Estate

(Refer: “ Weaker Rupee is not the cure at all”, Business line, July 19)

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Rupee Hits Nine Year High

Rupee Vs Dollar, Yen, Euro & GBP Currencies

Year 2006 Rs in terms of 46.2 USD Rs in terms of 59.05 Euro Rs in terms of Yen 41.1 Rs in terms of 86.6 GBP

May July 2007

Oct4 2007

41.05

39.58

% change wef may 2006 14.32%

55.35

56.14

4.9%

33.2 82.2

34.06 80.72

17.12% 6.78%

(Source: Business Standard: Date: 27th July, Oct 4th 2007; section II Money & Market) Conclusion: According to the given above we can conclude that rupee is appreciating with all currencies given above which reflects that Indian economy is doing very well, though it carries with it certain demerits (mentioned above). But these demerits can be worked upon and transformed into a blessing for the economy. But following are the things that have to be taken into consideration too:  By boosting productivity and improving business conditions, the export growth can remain buoyant despite stronger rupee. Rapid productivity growth plays an important role in explaining why a country’s export performance can remain robust even when it’s currency strengthens.  All currencies would ultimately have to move towards a flexible exchange rate regime, and by moving upwards first rather than downwards, economies would be in a better position to deal with crises. ( Source:www. Sifybusiness.com ‘ is rupee appreciation healthy’)  Normally foreign currency exposures are covered for a maximum of a year, but now exporters are contracting forward contracts for 3-5 years to curb the impact of an appreciating rupee on their profits. Hedging of commodity exposures also risen sharply with volatility in global markets. (Source: Business standard: 26th sep 2007 “ Exporters go long to cover Re Effect”)  In any case, weaker rupee would provide no guarantee that the exports would grow faster. (Source: ‘ Stronger rupee: End of India’s export boom’; Business Standard: date 6th Aug 2007, page 13).

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Rupee Hits Nine Year High

Bibliography: Newspaper Referred:  Business Standard  Business Line (e news paper)  Financial Express Websites Referred:  www.ficci.org  www.businessline.com  www.rbi.org.in  www.ndtvprofit.com  www.hindu.com  www.indianexpress.com Magazines Referred:  Business World  Business line

Thank You: NIPUN MAHAJAN (MBA FINANCE), IMM, New Delhi Mobile: 91+9971319385 Email: [email protected] , [email protected]

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