| |
India fears war-induced strong
rupee
By Indrajit Basu
KOLKATA - Wednesday had been an unusually busy
day for Alok Nandi a Delhi-based foreign exchange
consultant working for a prominent consultancy outfit.
President George W Bush's ultimatum that came a day
earlier confirming that "Operation Iraqi Freedom" would
begin in about 48 hours had seen the Indian rupee, which
has been gaining consistently against the greenback over
the months, hit its highest since May last year, to
touch Rs47.60 against the dollar.
Nandi's phone
wouldn't stop ringing. The volley of questions aimed at
him had just one theme: Was the appreciating rupee only
an aberration or the beginning of a trend that would
further gain ground in the days ahead? Although a day
later when the US attack on Iraq did begin, the rupee
lost ground a bit to trade at Rs47.84 to a dollar, it
quickly gained some of that back to quote at Rs47.76.
However, the country's federal bank, the Reserve Bank of
India (RBI), was also quick to announce that the apex
bank would intervene in the country's forex markets if
rupee lost too much. "And that means that the strength
of the rupee is not about to wane any time soon," said
Nandi.
For more than a year now - but more
markedly beginning last May - the rupee has been firming
up on the dollar, sending Indian businesses scurrying to
forex analysts for an outlook every time a US offensive
on Iraq seemed imminent. And on Wednesday, the dollar
looked much more vulnerable against the rupee than ever
before in the past decade.
The worries of Alok's
clients were unusual: they weren't concerned about the
typical fallouts of a war - higher costs, oil prices,
recession, inflation, etc - impacting the country's
economy. They were worried because the war could make
the US economy weaker than what it is now, which in turn
could make the dollar even weaker against the rupee.
Indian industry has for long been accustomed to
a depreciating rupee - since 1990 the currency has
depreciated an average 4-5 percent against the dollar
every year - and the sudden reversal in its fortunes
means a paradigm shift of strategies for businesses for
managing their foreign exchange transactions.
According to experts, a strong rupee, although
it looks good from the economy's perspective, has
implications that can often lead to negative impacts.
For instance, to exporters, the gaining rupee makes
their products not only much less competitive vis-a-vis
competing exporters from other countries, it also means
they end up earning fewer rupees for every dollar of
exports. On the other hand, importers - whose imports
become cheaper - would need to take a view whether to
hedge at all, if the strength of the rupee were to stay.
The recent strength of the rupee is no flash in
the pan, however. After bottoming at Rs49.06 against the
dollar last May 16, the rupee has steadily been inching
up. By January 1, it had climbed to 48.03 and on
Wednesday it reached its highest. If one were to see it
in percentage terms - which probably is the right way to
do it - the rupee has gained 3 percent between May 2002
and March 2003. Analysts say that it is the the first
time since the forex market was deregulated at the
beginning of 1990 that the rupee ended any calendar year
(2002) with net appreciation.
But besides the
war, India's exporting and importing communities are
worried about yet another significant development that
is adding to the strength of the rupee. Also for the
first time since 1990, India's current account - the
value difference between what India exports and imports
- registered a surplus. This is important because most
of surplus was due to a marked rise of India's exports
to the United States. India has become the 19th-largest
exporter to the US, up from 22nd a year earlier, logging
a trade surplus of $10.6 billion in India's favor in
2002.
And that's not only because of software
exports. Although India's software services exports to
the US went up by nearly 20 percent to $5.7 billion in
calendar 2002, the rise was higher - by 24 percent - in
merchandise exports. These moved from $9.7 billion to
$12 billion, while total US exports to India stagnated
at around $7 billion during that year.
And
neither is the country's exports surge a flash in the
pan. Since January 2002, Indian exports have done
extremely well. "The reasons are all to do with the
fundamentals of the economy," said L Mansingh, director
general of the Department of Foreign Trade. "Industry is
restructuring, cutting costs, getting competitive and
that's getting reflected in their performance and in
exports."
Growth in India's exports, Mansingh
added, is also commendable, for three reasons.
India is among the few countries that have improved
export performance amid a global slowdown and the poor
business outlook post-September 11, 2001.
There's a new attitude in India about exports.
"Traditionally, our attitude to exports has been that
we'll export enough to fund our imports," said Mansingh.
"That has changed. Our exporters are now selling to earn
foreign exchange."
Most important, strong export growth is linked to
the recovery of the domestic manufacturing sector.
However, A V Rajwade, another forex consultant,
offers a contrary view. According to him, if one were to
look at the real effective exchange rate (what
economists call REER) index for the rupee, it has
depreciated (by about 3 percent) in the past one year.
How? Because the other three global currencies - the
euro, the pound sterling and the yen - have gained much
more against the dollar than has the rupee.
Still, there are experts who believe that the
rupee's gains are not only due, but long due. "Even at
present rates, the rupee is undervalued by some 25
percent versus the dollar, on price parity," said Mark
Mobius, president of Templeton Emerging Markets Fund,
who has been predicting a rupee correction for the past
two years. Mobius also thinks the war in Iraq is going
to aggravate the weakening of the dollar against the
rupee. That's because he expects India to bag a major
chunk of the estimated $1 billion a week of Iraq's
rebuilding contracts, which will increase the flow of
dollars. "And such inflow is not only here to stay,
there's no dollar outgo because it comprises earnings,
not debt," he added.
The RBI has been mopping up
the excess supply of dollars worth between $500 million
and $1 billion a week to keep the rupee from
appreciating to a point where it hurts exports. But the
bank's overall policy seems to be to let market forces
determine exchange rates, and that signal has gone
through to traders and industry.
And that's
another reason experts are sure that the rupee's gain is
not momentary, but reflective of economic fundamentals.
(©2003 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com
for information on our sales and syndication policies.)
|
| |
|
|
 |
|
