Roller-coaster rupee roils Indian markets
By Raja Murthy
MUMBAI - Travelling to India? Be happy. An Indian going abroad? Moan and groan.
The Indian rupee has nose-dived against the US dollar to breach two-year lows
of 45.46 to the US dollar, a depreciation that has baffled exporters and
importers, as well as raising concerns on currency stability and the
effectiveness of controls on inflation. By Tuesday it had fallen to 46.94 to
the dollar.
"We have not seen such a currency fluctuation in the past two decades," said
Ganesh Kumar Gupta, president of the Federation of Indian Export Organizations
(FIEO), the leading export promotion confederation in India whose members
account for nearly three-fourths of the country's exports. "There is talk in
the
market that the rupee might even touch 49 to the dollar. Such volatility is not
good for the country."
Exporters, who according to the script should have been celebrating with better
returns for the rupee against the dollar, are instead somberly left counting
mixed blessings. Importers are expressing worries about higher costs of
manufacturing materials in a market already contending with inflation at more
than 12%. The declining value of the rupee drives up the cost of imports.
The scale of the sudden rupee dip has astonished market players after a decade
in which they had seen the currency strengthen against the dollar, culminating
in a 12% rise in 2007 before hitting a high of 39.27 on January 16 this year.
That strength prompted the government to produce a US$1.7 billion package to
help rescue exporters struggling to manage amid disappearing margins.
The reasons for the rupee's sudden slide range from a hunger for the US dollar
from offshore companies, the price of crude oil falling below $100 a barrel,
boosting oil purchases in US dollars bought by selling rupees, and a
better-than-expected outlook for the US economy, leading again to greater
demand for the US dollar.
Even as experts chew over why the dollar has suddenly gained unexpected muscle,
Indian exporters are dampening conventional wisdom that a weaker rupee means
larger profits for them by helping them to win sales with cheaper products
priced in rupees.
"The rupee falling to 45 or 42 to the dollar really doesn't help exporters,"
says G K Gupta, who owns a leading Mumbai-based garment exporter, Vijay Silks.
"Buyers in Europe and the US are asking for hefty bargains, or threaten to take
their business to other countries."
Yet whenever the rupee strengthens, foreign buyers don't want to pay the higher
dollar but insist on paying at the exchange rate when the deal was fixed,
resulting in lower profit margins for the exporter, complains Gupta.
Exporters say that mostly those who have not hedged against the dollar can
profit immediately from the favorable exchange rate. FIEO estimates that more
than 50% of exporters had hedged dollars at around 41 to the dollar when the
rupee was on an upward roll in 2007.
Information technology companies, which are big foreign exchange earners, "have
also not gained as much as expected from the rupee falling because they hedged
the dollar for six-month positions", says Gaurav Dua, head of research of
ShareKhan, one of India's top online stock brokerages.
"Unless the rupee holds on to the 45-rupee mark for a year or three quarters,
IT companies are not going to gain any real benefits, " Dua told Asia Times
Online. "The big IT companies such as Infosys [Technologies] have about 30% of
their billings in euros and pounds sterling, and the rupee's gain against these
currencies has offset weakness against the dollar."
IT companies such as Infosys have also suffered in the recent overall market
uncertainty as widespread selling pushed down the Bombay Stock Exchange Sensex
index to close nearly 400 points on September 12 at the end of a weeklong
downward trend.
The negative sentiment was further intensified when brokerage firm CLSA sent a
note to clients on September 12 that Infosys may miss revenue forecasts, based
in US dollar terms, in the three months to September 30 and the full fiscal
year ending March 2009. Infosys in July forecast revenue would increase by up
to nearly 20% in the present quarter under US accounting rules.
Infosys, which gets about 63% of its sales from North America, with more than a
third coming from banks and insurance companies, is already feeling income and
sales growth hit as those key sectors cut spending amid the intensifying US
financial crisis. Net income growth slowed to 21% in the three months ended
June 30, compared with 35% a year earlier.
India is seeking to meet an export target of $200 billion for the year ending
March 2009, compared with the target of $159 billion for 2007-08.
Exports in July grew 31.2% to $16.34 billion compared with $12.45 billion for
the corresponding period in 2007. With more exporters hedging their fortunes to
a fixed dollar-rupee exchange rate, India's export growth story depends more on
a less-dancing rupee.
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