The rupee’s march towards a 20-month high against the dollar on Wednesday has cast a shadow over the sustenance of a recent rebound in export growth that touched a six-and-a-half-year high in March. While the sustained rise in the rupee poses risk of an erosion of India’s export competitiveness, persistent volatility in the movement of the domestic currency, unless managed, could make it difficult for exporters while firming up contracts, according to exporters from a range of sectors like garments, engineering goods and even farm products.
Garment exporters said while the rupee surged, currencies of competing nations have devalued, brightening their export prospects. The Chinese Yuan got depreciated by around 13%, the Bangladesh Taka by roughly 6% and the Vietnam Dong by about 7% over the last three months or so. If the rupee clocks below 63 and continues to fluctuate for the rest of the fiscal, garments exports could drop by 5-10%, said a major garment exporter, who didn’t want to be named.
Typically, the average currency hedging by exporters across key manufacturing sectors is to the the tune of 50%, an exporter said.
However, smaller players across sectors like textiles and garments are the most vulnerable to the rupee rise, as the hedging is much less, he added.
Ashok G Rajani, chairman of Midas Touch Apparels and also the chief of Apparel Export Promotion Council chairman, too, voiced concern over the currency surge. “Exporters are not able to book orders due to over-valued rupee as apparel exports are highly price-sensitive.” He said the primary reason why a garment package offered last year has not been able to boost exports to the desired level so far is the depreciation of currencies of competing countries like China, Bangladesh and Vietnam when the rupee is strengthening.
FIEO president Ganesh Kumar Gupta said to minimise the impact of the rupee rise, certain incentives in the form of interest subvention, being given to the manufacturers, may be extended to merchant and various other sectors of exports. Moreover, higher MEIS across sector of about 3% can somewhat offset the losses on account of rupee appreciation and further boost exports in such challenging times. He expects that if the currency appreciates in such a manner, the rupee will be in the range of around `62 to a dollar in the next three-months period.
According to the real effective exchange rate (REER) index of the Reserve Bank Of India, the rupee was overvalued by 18% in February and close to 20% in March, Rajani said (see chart). He called for a carefully considered strategy and more pragmatic approach to arrest the rise of the rupee in overall interest of exports employment generation.
TS Bhasin, who exports a lot of engineering goods and is also the chairman of the Engineering Export Promotion Council (EEPC), said the sharp 47% growth of exports in the sector witnessed in February will be tough to maintain with this kind of the strength of the domestic currency.
The rupee’s rise came at a bad time for Indian exporters when some developed markets, especially the US, are turning more protectionist and price effect with the commodity surge is gradually diminishing. In the absence of any reform to make the transportation and logistics costs — which accounts for roughly cheaper in the country (like trimming the rail freight costs), the rupee’s surge makes a substantial dent in the cost-competitiveness of Indian exporters.
EEPC’s Bhasin said the central bank should ensure that the “liquidity coming in droves in the Indian equity and debt market must not harm our fundamental strength in exports”.
Since many manufacturing centres are far away from ports, the transportation and other expenses drive up India’s cost to export, compared with other Asian peers. According to a World Bank report, India’s cost to export stood at a massive $1,332 per container, compared with $572 in Indonesia, $525 in Malaysia.
Merchandise exports jumped as high as 28% in March from a year before —growing for a seventh straight month even in the aftermath of demonetisation — thanks to a rebound in the outbound shipments of engineering goods, petroleum products and garments, apart from a favourable base. With this, exports in the last fiscal grew 4.7% to $274.64 billion — a much-needed rise after two successive years of decline. But with a strong rupee and diminishing favourable base effect, it’s now becoming increasingly difficult to predict the course of export growth in the coming months, said the exporters.