SPJCM - The Big Picture : Impact of Rising Rupee

About Big Picture

It is an event designed and organized by the students of SPJCM to provide a platform for open discussion. It facilitates free flow of thoughts on a particular topic in an organized manner. It was initiated by Dec 06 batch at a small level and is now maturing into a big event. Let me just tell you how this event is organized. The topic is decided and communicated to the students a week before the date of event. It initially begins with presenters giving their views on the topic, then choosing volunteers who want to be a part of debate and then the discussion is left open to the audience and the debaters. The event is very well managed and controlled by the moderators who facilitate the discussions. The topic is looked from every aspect and a ‘big picture’ analysis or post mortem is done.
Till now 7 topics have been covered and the topic discussed below is the 8th one. As we mature, so does our process. So from now on we have decided to summarize the discussion, which is done during the course of the event. The summary provided below captures the important issues and points made in the event and will be a reference for our future batches.


Issue at Hand: Impact of Rising Rupee on Indian Exports

Indian rupee is on a run. A part of it can be attributed to inflation and another to India’s growth story. In the past six months rupee has appreciated nearly 10% against dollar. At the beginning of the year rupee started at 44.20 and it currently stands at a near-decade high of 40.30 against dollar. On the contrary, inflation hovered at around 6.73% in January end and it now stands at 4.27%. Rupee appreciation has been the sharpest in three decades in the April-June quarter this year and analysts expect the rupee to gain further.

Presenters View point: Our presenters covered the topic in almost every respect and gave a new dimension to it. Some of the points which require a mention are as follows:

Impact of rising rupee

1) For the FY 07-08, the exports expected to go down from $160 billion to $ 145 billion.
2) Revenue of Textile industry has fallen by 3.5%
3) China textile exports increase by 57%
4) Loss of export competitiveness: A string rupee is hurting the profitability of exporters and eroded their competitiveness by losing their orders to competitors such as China, Thailand, Pakistan, Sri Lanka, Bangladesh, Vietnam and Indonesia.
5) Effect on Indian outsourcing- Indian outsourcing industry, which gets its all major contracts or projects from US, is losing on margins.
6) NRI in gulf are losing out substantially on the rupee rise and foreign jobs are looking less attractive.
7) Foreign borrowings have become cheaper and companies have started spending on Hedging risks. Infosys has booked a forward contract of $975 million for 6 months and TCS has booked contract of $2.5 billion for 1 year.
8) Imports have increased Competitive worries
% appreciation of rupee stands at number 2 position just after Brazilian Real. Major competitors in Asia pacific include China, Malaysia, Singapore and Bangladesh. The % appreciation of the currency of these countries is just 1-2% as compared to 8.5% in case of India. Currencies of Hong Kong and Taiwan are depreciating. All this calls for a great cause of concern.




Reasons for Appreciation
1) FDI investments have increased to around $16 billion, which is 3 times the previous year.
2) External commercial borrowings for funding domestic projects has increased at a rate of 33% which has lead to the rupee appreciation
3) Raising money through ADRs and GDRs has also contributed to this rise in rupee. Inflows from ADRs and GDRs have increased by 48% year on year.
4) Remittances from huge number of Indians working overseas have also lead to rupee appreciation. Increase has been recorded at 35% from the previous year.

Why RBI is not intervening?
Inflation has long been a concern for the government and in order to control the rising inflation RBI sucked rupee from the market by increasing the CRR hikes which in turn lead to increase of interest rates. RBI wanted to suck liquidity from the market and control the rising prices.


The Bigger Picture: Debate

· Is Rupee rising or dollar falling?
If dollar is falling then there is very little we can do but if rupee is rising then some actions can be taken to balance out things. I think it’s both ways ie rising rupee as well as falling dollar. Dollar has also fallen against euro and other currencies. The aftermaths of US subprime lending market can be seen in terms of falling dollar and the ‘India’s shinning’ growth story can be looked in terms of rupee appreciating.

· Relative rise of rupee and our competitive strength: With the world getting flatter each day, one has to be on his shoes to look around for the changes that has happened or changes that can change the course of action। Our competitive strength lies in providing low cost products to other countries। Be it textiles, pharma or IT related products; we have been competing with the big giants like China and Russia। Now with the rupee rising Indian exports will lose their margins and if they increased the cost of goods in order to improve their margin, they will lose out the competitive edge to other countries. A survey conducted by the commerce ministry between March and June has predicted massive retrenchment and a potential financial loss of nearly Rs 1,00,000 crore due to a loss in value and competitiveness.
This is one side of the story. Looking at the other side ie imports make us feel strong and better. India’s imports exceed its exports. So with rupee rising, our imports are becoming relatively cheaper. The major import commodity is oil and its prices are touching record high every day. Currently as of July 20th the oil is trading at $76-77 per barrel. With rupee appreciating India is unaffected by rising oil prices.

· Efficiency is it a wakeup call: Infosys Chairman Mr। Narayan Murthy said that rupee appreciation was a macro economic issue and it called upon corporates to become more efficient, productive and reduce costs. In order to maintain our grounds of competitiveness, we need to think on measures to improve productivity and efficiency rather than focusing on depreciating rupee. This has to happen someday or the other and the trend as predicted can move rupee further. What needs to be looked here is efficiency, innovation and productivity. IT companies are now thinking to increase the working hours of software professionals and thereby increase productivity. Like China, we need to be efficient enough and devise new strategies to counter this rising rupee effect. Innovation is the key for sustained growth and development of any economy. Govt need to spend more on research institutes and we need to come up with some very innovative ideas and product that will help in keeping us way ahead of other countries.
· Political angle ->Jan prices 6.69% inflation oil at all time high and then UP elections: Over this period, RBI has not intervened in controlling the rupee rise. It is not that FDI inflow has increased too much. Earlier also we used to see huge FDI inflows but those were taken care by RBI intervention. RBI used to suck dollar from the market in exchange of rupee. This increase of rupee balanced its demand against the dollar and controlled the rupee/dollar price. RBI stopped sucking dollar from the market and has let the market forces to decide the price of rupee. This is because the UPA government was keen on reducing the inflation which stood at 6.67% in Jan end. Also, with the UP government elections approaching government didn’t want to lose their control because of rising inflation. Despite of governments/RBI’s effort to curb inflation the UPA govt lost badly in elections. The CRR hike by RBI followed by increase in interest rates by banks has controlled the inflation to a considerable extent. As of July inflation stands at 4.27% levels.

·Our Conclusion

One of principles of economics states “Society faces a short run tradeoff between inflation and unemployment”. If we have to control inflation then we will lose our competitive edge over exports and this will lead to unemployment. And if we try to control the unemployment then wages will increase and thereby liquidity and this will lead to rise of inflation. So we need to balance this inflation unemployment dilemma. What happens in the forex markets in weeks and months to come is still not certain. But the government and India Inc will definitely be watching the currency dilemma very closely. With the economy booming, inflation has to rise. There is very little that we can do about it. What needs to be looked at is striking the right balance between the two. Just like there is a balance of trade between imports and exports, there also has to be a balance between inflation, growth and unemployment.
I would like to end this note by saying that we have to strike this balance by being more innovative, productive and efficient. We should not think of getting business from US but we should strive hard to become another US.
By: Nitin Goyal (Batch of June 07 - 08 , IB - SPJCM )