NEW DELHI, Aug. 1 (IPS/GIN) — 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 abovethe $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 told IPS 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 seventy-seven 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.
Company 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. Said Ramesh Khanna, owner of a major apparel export firm based in the national capital: “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.”
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 Jul. 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 destabilising 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.=20
