The appreciation is not coming to a halt anytime soon...
It is the best, as well as the worst of times for our very own Reserve Bank of India. The good news – inflation has dipped to a five year low of 3.43% much below the RBI’s comfort zone; the bad news – the rupee has appreciated 15% in the last one year against the US dollar. At a crucial juncture when the Indian market is outperforming the rest of the world, the rupee appreciation phenomenon is not really coming to halt anytime soon and the best that the RBI can opt for is to moderate the pace of rupee appreciation, not reverse it.
An appreciating currency is dependent on the market forces of demand and supply operating in the forex markets and it truly signifies a robust and booming economy. Yet, the lamentation over the appreciation, from some corners, calls for due consideration.
Given the fact that most of India’s trade is invoiced in dollars, any change in the dollar’s rupee value has a disproportionate effect on the stakeholders e.g. exporters, importers, lenders, borrowers et al. Exporters get their sales proceeds in dollars, which, with the rising rupee, fetch less amount of rupees as every 1% change in rupee-dollar rate has an impact of 50 bps (100 bps=1%) on exporters. Analysts argue that bringing software industry under the lens of Fringe Benefit Taxation & Minimum Alternate Tax has further added to the worries of the industry already reeling under the pressure of rupee appreciation.
While exporters are in low spirits, it is happy hours for importers, borrowers in foreign currency. Though despite a few setbacks in sectors like IT, textile and leather; other sectors like petroleum, gems and jewellery, engineering et al have been contributing to the growing exports, the 18.91% growth in exports in August 2007 stands testimony to this fact.
With regards to textile and leather, industry players argue that no emerging economy has succeeded without its manufacturing sector becoming competitive globally. “The estimates of Federation of Indian Export Organisation (FIEO) that in the current fiscal, as a result of dip in exports in labour intensive sectors there will be a loss of eight million jobs. Looking at the massive inflow of dollars through ECB and Portfolio Investment, rupee-dollar exchange rate can touch Rs.38 by December 2008,” expressed G. K. Gupta, President FIEO.
The central bank is aware of the fact that an appreciated rupee will evoke more capital inflows and complicate monetary management. Sunil Sinha, Senior Economist, CRISIL, adds, “Currently, RBI is facing the famous ‘trilemma’ (stable exchange rate, free capital flows & an autonomous monetary policy) and it has a very difficult situation ahead of it.” To this end, the RBI has taken few concerted steps e.g. continuous intervention in forex market, imposing restrictions on ECBs, banning overseas borrowing to meet rupee expenditure, encouraging higher dollar spend, raising investment limit in overseas ventures et al. All of these are attempts to ease pressure on rupee appreciation, encouraging capital outflow and to some extent, offset the massive inflow.
It is the best, as well as the worst of times for our very own Reserve Bank of India. The good news – inflation has dipped to a five year low of 3.43% much below the RBI’s comfort zone; the bad news – the rupee has appreciated 15% in the last one year against the US dollar. At a crucial juncture when the Indian market is outperforming the rest of the world, the rupee appreciation phenomenon is not really coming to halt anytime soon and the best that the RBI can opt for is to moderate the pace of rupee appreciation, not reverse it.
An appreciating currency is dependent on the market forces of demand and supply operating in the forex markets and it truly signifies a robust and booming economy. Yet, the lamentation over the appreciation, from some corners, calls for due consideration.
Given the fact that most of India’s trade is invoiced in dollars, any change in the dollar’s rupee value has a disproportionate effect on the stakeholders e.g. exporters, importers, lenders, borrowers et al. Exporters get their sales proceeds in dollars, which, with the rising rupee, fetch less amount of rupees as every 1% change in rupee-dollar rate has an impact of 50 bps (100 bps=1%) on exporters. Analysts argue that bringing software industry under the lens of Fringe Benefit Taxation & Minimum Alternate Tax has further added to the worries of the industry already reeling under the pressure of rupee appreciation.
While exporters are in low spirits, it is happy hours for importers, borrowers in foreign currency. Though despite a few setbacks in sectors like IT, textile and leather; other sectors like petroleum, gems and jewellery, engineering et al have been contributing to the growing exports, the 18.91% growth in exports in August 2007 stands testimony to this fact.
With regards to textile and leather, industry players argue that no emerging economy has succeeded without its manufacturing sector becoming competitive globally. “The estimates of Federation of Indian Export Organisation (FIEO) that in the current fiscal, as a result of dip in exports in labour intensive sectors there will be a loss of eight million jobs. Looking at the massive inflow of dollars through ECB and Portfolio Investment, rupee-dollar exchange rate can touch Rs.38 by December 2008,” expressed G. K. Gupta, President FIEO.
The central bank is aware of the fact that an appreciated rupee will evoke more capital inflows and complicate monetary management. Sunil Sinha, Senior Economist, CRISIL, adds, “Currently, RBI is facing the famous ‘trilemma’ (stable exchange rate, free capital flows & an autonomous monetary policy) and it has a very difficult situation ahead of it.” To this end, the RBI has taken few concerted steps e.g. continuous intervention in forex market, imposing restrictions on ECBs, banning overseas borrowing to meet rupee expenditure, encouraging higher dollar spend, raising investment limit in overseas ventures et al. All of these are attempts to ease pressure on rupee appreciation, encouraging capital outflow and to some extent, offset the massive inflow.
