Cash In On Currency Realignments

Written by Vivek Bharati | Updated: May 23 2003, 05:30am hrs
With the rupee-dollar exchange rate heading towards 46.5 or thereabouts, Indian companies will have to step out of the comfort zone of the last three decades created by the hitherto one-way movement of the rupee versus the dollar. Thus far, CFOs of most companies made guesses only on the extent of rupee depreciation against the dollar while planning cash flows. With the Indian economy more open to trade and capital flows than ever before, the corporate finance planner will have to increasingly contend with global currency realignments and unpredictability of the future trajectory of the rupee vis-a-vis major currencies.

The erosion of margins caused by the appreciation of the rupee vs the dollar on exports booked in the US currency is just one dimension of the ongoing currency realignment. And this too would depend on the import content of exports. For instance, apparel exports with low (dollar) import content would suffer more than gems and jewellery exports that have an import content of nearly 90 per cent.

The impact of ongoing currency change, however, is far more wide-ranging and corporates must look at the whole picture both to minimise the damage and maximise financial and market opportunities. The depreciating dollar has made dollar loans raised abroad more attractive than those raised in euros, for example, and borrowing or debt-swapping opportunities could be leveraged to enhance cash flows.

It is imperative, therefore, that companies take a close look at the movement of major currencies and identify their impacts on trade and financial flows. Two news reports from the Wall Street Journal in this newspaper carried on May 21 highlight the differential impact of currency movements. First, the expectation that a weak dollar would boost US companies dependent on export earnings. Indian companies outsourcing to US exporting companies should therefore keep a close tab on the opportunities that may arise out of this.

However, since a weak dollar also raises import costs for these US companies, the trick would lie in reducing margins to gain greater market penetration through more competitive pricing strategies. It would be useful here to track competitors from other countries. For instance, if the main competitor is from Thailand, the pricing need not be that aggressive as the baht is also appreciating against the dollar. Indeed, CFOs must track Asian or other currencies of countries which may be competitors in the product relevant to Indian companies. Similarly, for companies importing products from advanced countries, switching over to dollar imports from euros would make sense.

The second report points to the possibility that the dollars slide could push Europe closer to recession. Therefore, Indian companies looking at switching over to export prospects in the Eurozone need to analyse the impact of the currency realignments on this market. But there are always two sides to this change. While a recessionary prospect means that market growth could slow down, there is always opportunity to cash in on, in that European companies could be looking at more competitive suppliers and some Indian companies could edge their way into the market. In many products, Indian companies are marginal suppliers and could edge into markets where recession puts downward pressure on prices. The fact that this coincides with the rupee depreciating against the euro does mean that aggressive marketing could deliver results.

The short point is that currency realignments throw up new opportunities even while they pose a challenge to improve efficiencies and move up the value chain. What this requires is the nimble-footed ability to move quickly and adapt to changing scenarios. But this ability to adapt cannot be built overnight. This requires a management style and structure that enables the entire organisation to respond quickly. Equally important, companies that aspire to be aggressive global players need to reassess their entire value chain, and make it flexible enough to shuffle their vendors globally to mitigate the impact or maximise the opportunity thrown up by currency changes.

Finally, companies need to scale up their capabilities to analyse the differential impact of currencies on different segments of global markets. All this is stuff that global leaders are made of and Indian companies must learn their lessons to grow outward rather than sit back and rue the adverse impact of dollar appreciation on their margins on foreign sales.

The author is an advisor to Ficci. Views expressed herein are personal