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Appreciating Rupee:NO NEED TO PANIC, by Dr. Vinod Mehta, 19 July 2007 Print E-mail

 

Economic Highlights

New Delhi, 19 July 2007

Appreciating Rupee

NO NEED TO PANIC

By Dr. Vinod Mehta

The appreciation of the rupee vis-à-vis the US dollar (the same as the depreciation of the US dollar vis-à-vis the rupee) is causing concern among the exporters especially the software companies as they expect a fall in their export earnings because the US dollar would now fetch less rupees.  Clearly, this is a part of the ongoing economic dynamics wherein the fiscal fundamentals are strong, foreign investors are quite upbeat about the Indian economy and are thus willing to pour in more money.  Reportedly, in the first fortnight of this month foreign funds pumped US $ 4.1 billion into India, more than double the $ 2 billion they had pumped in November 2006.

 

One side effect of this is that the rupee is being increasingly accepted as a “hard currency” in many countries even though the Reserve Bank of India has not yet declared it as fully convertible. However, the people believe that the rupee could make good asset! Recall, 10 years ago, when a depreciating rupee had made the Indian importers jittery, I had then written in my column that there was no need to panic. 

 

To quote: “After 27 months the rupee is again in turmoil vis-à-vis dollar and other hard currencies.  On 1st December, 1997 the value of rupee crashed to Rs 39.30 to a US dollar.  It may be recalled that in September 1995 the rupee was in turmoil when it touched a low of Rs. 35 against the US dollar in the foreign exchange market. In other words in past the 27 months the value of rupee vis-à-vis US dollar has depreciated from Rs 33.78 to Rs 39.30, i.e., by almost five and a half rupee. 

 

Since the introduction of the economic reforms in 1991 when the controlled exchange rate policy was done away with, the rupee has depreciated by almost Rs eight.  Not bad, given the political instability in the country.  Indeed it should not cause any concern since we have shifted to a market determined rate of rupee against all the hard currencies.  This depreciation (and sometimes appreciation) is part of the game and most of the time good for the economy.”

 

Moreover, from 1998 till 2003 the rupee was relatively stable vis-à-vis the US dollar and then rose steadily. But it is only in the past few weeks that the appreciating rupee began unsettling the applecart of many exporters. The rupee hit the intra-day high of $40.28 on 28 May while it finished at 39.85 a dollar on 13 May 13, 1998.  Last week it was Rs. 40.50 to a dollar.  In 2002, for every dollar worth of exports, an exporter got nearly Rs 49. But in December 2003, an exporter got Rs 45 for every dollar, which translated into a fall of approximately seven per cent.

 

The software companies are the hardest hit as their software exports are mainly for the US market.  To quote: “Indian software firms get 60 per cent of their revenues from the US and a one per cent  appreciation of the rupee against the dollar can impact earnings before interest and tax margins by between 30 and 50 basis points. Irrespective of the fact whether the company is big or small, all of them have been hit. The margins may be impacted by as much as 4 per cent.”

 

 

What is the remedy? One, devaluation, but this instrument to check appreciation of any currency is outdated. Two, the buying and selling of the dollar by the Central Bank to stabilize the exchange rate of the rupee, is effective only as a short term measure.  However, because of the hue and cry raised by the exporters the Government has come out with a Rs 1,400 crore relief package for the exporters. 

This includes interest subsidy to the tune of Rs.600 crore on bank loans and Rs.800 crore on duty drawback on inputs used in the manufacture of export goods and other measures.  The interest subsidy is meant only for small and medium sized exporters while the duty drawback measure will apply to all the exporters.  According to the exporters, though the relief package is not sufficient it would mitigate some of their problems

Paradoxically, when the rupee is depreciating the importers are a worried lot and when the rupee is appreciating the exporters are the worried lot.  This is because when the rupee is depreciating the importers have to pay more rupees to buy a dollar and thus imports become expensive while the exporters get more from a dollar. However, when the rupee is appreciating the importers have to pay less to buy a dollar while the exporters get less from a dollar.  For instance, India imports huge quantities of oil, so when the rupee is depreciating our oil import bill goes up and when the rupee is appreciating our oil import bill comes down.

If the exporters are fretting about the declining export earnings because of the appreciation of the rupee, many others are happy as the appreciating rupee brings down our import bill of a number of capital goods and commodities like oil, pulses, grain etc.  True, the appreciating rupee is only a temporary phenomenon which will stabilize at some level but we can use this opportunity to import capital goods to strengthen the capital base of our manufacturing sector.  The time is also appropriate to import and build inventories of critical raw materials.  We can also build our stocks of grain, pulses and edible oil to keep a check on inflation.

The ideal thing would be for the Reserve Bank of India to manage the exchange rate fluctuations within a certain band to be determined by it.  But more important, our business houses and industries must realize that as the economy gets stronger, the rupee will also get stronger in relative terms.  Therefore, businesses which are heavily oriented towards the US markets must factor in the appreciating rupee in their calculations and devise strategies to check the erosion in their export earnings.  Moreover, they also need to reduce their dependence on the US market and move towards the European market, Japan etc., and start earning in Euros and Yen.

However, for a large number of people the exchange rate variations do not have much of a meaning unless some of the items of their daily consumption like pulses happen to be imported. The common man is concerned more with the domestic inflation which affects his living standards and not the appreciation or depreciation of the rupee which is remotely connected to his living standard.  Fortunately, the domestic rate of inflation has come down which should make the consumer happy.

Plainly, there is no need to panic about the appreciation in the value of the rupee as it will not affect the common man to any significant extent.  In economic terms, it means automatic correction in the exchange rate with every player in the foreign exchange market adjusting his requirements accordingly.  The packages for exporters are unnecessary.  The businessmen must learn to live with the exchange rate fluctuations in this era of globalisation and stop looking for succour from the Government. ---- INFA

(Copyright, India News and Feature Alliance)

 

 

 

 

 

 

 

 

 

 

 

 

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