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Worries over climbing Indian
rupee
By Ranjit Devraj
NEW
DELHI - India's exporters are worried by a phenomenon
not seen in decades - the steady appreciation of the
rupee over the dollar and foreign exchange reserves
hovering above the US$80 billion mark.
Particularly concerned at the unstinting rise of
the rupee against the dollar in the first quarter of the
fiscal year that began in April 2003 and continued into
July are software exporters, who now earn $10 billion
worth of foreign exchange annually. The bulk of this is
made by such majors as Wipro Technologies, Infosys
Technologies and Telecommunications Consultants India
Ltd (TCIL).
Wipro's chief finance officer,
Suresh Senapathy, said that the rupee's appreciation
against the dollar represented a new challenge to his
company, which earned $195 million in the first quarter
of the fiscal year. A hefty 77 percent of that came from
software exports. "Proactive hedging helped us maintain
exchange rates in the first quarter, but effective
management [of the appreciating rupee] for long will be
a difficult challenge," Senapathy said.
Officials at the rival Infosys Technologies,
which earns 75 percent of its revenue from North
America, said they expected a loss of more than $20
million from their profit margins this fiscal year as
result of the rising rupee.
Both Infosys and
Wipro are now shifting their business to Japan and
Europe to compensate dollar losses through gains made by
earnings from the steadier euro and the yen.
Other exporters who earn a combined average of
$40 billion annually are now looking to the euro, yen
and the British pound as well as to increased export
volumes to make up for the losses. They see comfort in
the fact that the currencies of India's competitors,
such as China, Malaysia, and Thailand, have either not
appreciated or not appreciated as much as the rupee.
"We are still competitive but cannot hold out
much longer if this trend continues and there are
countries in the region like Taiwan and Philippines
whose currencies have actually depreciated," said Ramesh
Khanna, owner of a major apparel export firm based in
the national capital.
A recent survey conducted
by the Federation of Indian Chambers of Commerce and
Industry (FICCI) covering 100 importers, exporters and
financial institutions showed that most of them believed
that the lower value of the dollar against the rupee had
eroded their competitiveness in the international
market. FICCI made the assessment that the rupee was
likely to continue on its upward trend, although this
has been challenged by other experts. Saumitra
Chaudhury, economic adviser to the prestigious
Investment Information and Credit Rating Agency (ICRA),
said in an interview that what is happening is
determined not only by trade but by steady foreign
direct investment (FDI) flows which he described as
"transient". "This type of capital flow invariably
levels off as asset prices rise - and that is when
profit opportunities begin to diminish and investors
start moving their capital out," Chaudhury said.
Some of the flows were the result of the fact
that interest rates in India continue to be between 3
and 5 percent points higher than in the United States
and other advanced countries. This encourages wealthy
expatriates, foreign investors and even hedge funds to
take advantage of the situation, exposing the economy to
more footloose capital and highlighting challenges that
other developing countries have faced in liberalizing
their economies.
India maintains high bank
interest rates for political reasons - mainly because it
does not want to hurt pensioners and people who have in
the past been encouraged to put their savings into the
provident fund and government-subsidized and tax-exempt
bonds and saving instruments. On July 17, the Reserve
Bank of India (RBI) moved to fix a limit on the interest
rates that foreign depositors would get on repatriable
deposits.
According to Chaudhury, what was
happening was the inevitable result of India opening up
its markets to foreign investment - and the phenomenon
cannot be stopped unless the country reverts to its
socialist, protectionist past. Chaudhury said it was
neither practical nor desirable for the Reserve Bank of
India to interfere in the process by buying up dollars
to shore up the exchange rate as it did when the rupee
sank to the psychological benchmark of 46 rupees to the
dollar two weeks ago.
Officially, the government
seems ready to give up this interference. A study
released late June by the Ministry of Commerce admitted
that the RBI was "finding it difficult to keep the rupee
from appreciating despite heavy buying of dollars". The
International Monetary Fund (IMF) has, however,
commended India's management of its foreign exchange
reserves and said they were comparable to the best
global practices.
In a document titled
"Guidelines for Foreign Exchange Reserve Management"
released earlier this year, the IMF said the Indian
government was "maintaining a capacity to intervene in
the markets to support the exchange rate regime or to
contain excessive volatility in the foreign exchange
market". "India intervenes in the market to even out
lumpy demand or supply in thin markets to prevent
destabilizing speculation while facilitating foreign
exchange transactions at market rates for all
permissible purposes," the document said.
For
the first time this year, India, because of its strong
foreign exchange position, turned from being a borrower
from the IMF to a lender. It contributed $291 million to
the multilateral institution in two tranches in May and
June.
"Selection of India as member of the
Financial Transaction Plan for the first time by the IMF
sends strong signals regarding the country's strength
and resilience of its external sector to the
international community," the RBI said in a note
following the transfers that seemed to be aimed at
India's despondent exporters.
(Inter Press
Service)
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