The Rising Rupee

The rupee’s steady performance over the last few months has not been welcomed by a section of Indian business. Appreciating by almost 10% since 2006 and floating around Rs.40 to a US dollar, it heralds good times for the Indian economy at large.

However, it is the exporters who are most affected as their products
become less affordable for overseas clients. The rupee started firming
up from September 2006 onwards, and has maintained its upward climb
without looking back.

The Indian rupee has gained against other currencies as well, to the
extent of 8% against the pound, 6.9% against the euro, and 11.2% against
the yen, between January and May 2007.
Last fiscal, Indian exports were billed to the extent of 86% in dollars,
while euro invoices accounted for just 8%. As for imports, US dollars
accounted for 89% of the total, leaving 7% for the euro.

Reasons behind the Rise

The rush of foreign exchange from foreign direct investment and NRI remittances
has been responsible for the rupee’s very comfortable standing. Impressed with India’s
robust economy, foreign companies have set up base here with total foreign
investment adding up to USD 16 billion in 2006-07, a clear three-fold increase
over the previous year.

Indian companies resorted to external commercial borrowings (ECBs)
in a big way to finance their businesses and acquisitions abroad,
amounting to USD 12.1 billion between April and December 2006.
Foreign institutional investors have also played a significant role
in propping the rupee, with the inflow amounting to USD 8.1 billion
between 2003-04 and 2006-07.

The flow has continued into 2007, touching
USD 4.6 billion by May.
Indian companies have been tapping overseas funds through global depositary
receipts and American depositary receipts which increased by 48% over
the last year, amounting to USD 3.8 billion
NRI remittances into NRI deposits scaled the ladder as banks offered
attractive interest rates. NRI deposits amounted to USD 3.8 billion
in 2006-07, and the total deposits held in NRI deposits at the end
of the last financial year stood at USD 39.5 billion

The Predicament

As imports get cheaper, and inflation comes under control at 4.3%, it is
the exporters who have to bear the brunt of the costlier rupee. Exports
have been rising over the last few years, but have suffered a setback with
the dollar’s slide with reference to the rupee.

The Indian Government is extending sops to exporters through a USD 3.5
billion package, but they remain unimpressed.
The IT industry is fearful of losing its competitive edge in the global
market against the rising rupee, and so are the leather, foods, handicrafts,
diamond and garment exporters, the automotive parts suppliers, and all those
small and medium enterprises (SMEs) who are geared towards exports.

The RBI has responded with restrictions on ECBs by Indian companies
to stem the flow of funds, which has impacted some sections of Indian
business, especially real estate. The apex bank has also raised the cash
reserve ratio to check liquidity, which in turn have amplified interest
rates.

However, these measures would check the rupee only marginally, and
analysts have forecast an annual exchange rate to Rs.41.30 against
the dollar in 2007, and a further appreciation to Rs.40 to a dollar
in 2008.

Drawing a parallel with the free fall of economies in South East
Asia in 1997, some economists hold the view that it is best to allow
market forces to operate, without the RBI’s
active intervention. An expensive rupee would lend some caution to the market,
and overseas investments by Indians would counter the prevailing trend of
the currency.

Be Positive…

…is the advice of experts who recommend affected companies to look beyond the US market, and to focus on business in Europe instead.

The euro and the British pound are faring better vis-à-vis the rupee, and the dependence on the US dollar could be reduced.

If there are some businesses who suffer from the stronger rupee, there are as many who benefit from it too.

For aviation companies, and those importing equipment and technology, the
rupee’s current status works to their advantage. Similarly, it’s
also the best time to make overseas acquisitions.

Photo: General Post Office and Reserve Bank of India, Kolkata, India by Vyacheslav Argenberg, licensed under CC BY 4.0, via Wikimedia Commons.