Exporters brace for rough ride on Indian rupee's relentless rise

Written by Kirtika Suneja | Banikinkar Pattanayak | New Delhi | Updated: Mar 22 2014, 15:27pm hrs
Indian rupeeAn 11.5% appreciation of the Indian rupee from its lowest against the dollar in last year and the chances of its strengthening further in the coming months have exporters worried. AP
An 11.5% appreciation of the rupee from its lowest against the dollar in August last year and the chances of its strengthening further in the coming months have exporters worried.

A strong rupee will hit textile and garment exporters as currency hedging is largely absent with most players and margins are already under pressure due to tough competition from countries like Bangladesh. In the case of gems and jewellery and electronics exporters, the high import content would partly offset the adverse impact of a strong rupee but if the currency gains further, the net impact would indeed be negative.

In textiles and garments, there is an overwhelming presence of unorganised players, accounting for roughly 80% of the garment and 90% of the fabric segments. These units dont hedge against currency fluctuations and resort to limited imports of raw materials. The sector is crucial as it accounted for 10.54% of overall exports last fiscal and it employs 35 million people, having become the largest employer after agriculture.

Exporters of electronics products and traditional sectors like gems and jewellery, handicrafts, carpets, leather and marine products have also taken a hit in their margins.

Sumit Keshan, chief financial officer of Gokaldas Exports, said in times of sharp sharp volatility in the rupee movement, even hedging becomes difficult. In the short term, we as a company are not affected as we have a strong hedging policy. However, if the appreciation continues beyond that, not just us, most of the players are going to be affected, he said.

The countrys overall exports grew at double digits for four months starting July this fiscal, enabled by the rupees depreciation, among other things.

However, the pace of growth slowed after the rupee started strengthening a bit from the record low in August, which finally resulted in a negative growth of 3.7% in February. The export target of $325 billion for 2013-14 is set to be missed as outbound shipments until February were to the tune of $282.7 billion.

One of the major reasons for the pick-up in textile and garment exports in recent months is the depreciation of the rupee. If the rupee appreciates to, say, the 56 level, the profitability of the sector, which is even less than 10% from a year before even after the latest surge in exports, will be neutralised. In garments, it could also hurt our competitiveness compared with Bangladesh further, which enjoys low labour costs, said DK Nair, the secretary general of the Confederation of Indian Textile Industry. According to an official study, Bangladeshs manufacturing costs in the weaving and processing sector was 13% cheaper than Indias. So while the currency of the neighbouring nation stays steady, any depreciation of the Indian rupee hits domestic exporters accordingly.

After a marginal drop last fiscal, overall textile and garment exports will likely rise 17.6% in the current fiscal from a year earlier to $40 billion due to the rupee depreciation in earlier months and a recovery in US demand, industry executives said.

But the target of $43 billion for the 2013-14 fiscal will still be missed, thanks to the recent appreciation of the currency and the absence of any major policy intervention.

According to a Barclays report this month, the rupee may hit 59 within a month, while some currency analysts have forecast the domestic currency may appreciates further to hit 57 in the next three months. The domestic currency gained 0.7% on Friday to close at 60.89 against the greenback, having appreciated by 1.4% so far this month. While a relatively strong currency may help an import-dependent economy like India's in the short term, a drop in exports cripples manufacturing and hurts growth.

Textile and garment firms usually hedge 30-40% of their revenues in the currency market to beat risks, although some heavily export-oriented ones like Welspun hedge a bit more, according to senior industry executives. We hedge around 60% of our revenues while the remaining 40% is kept open as a risk mitigation strategy. Hence, we are not much affected when the rupee appreciates or even depreciates, said Dipali Goenka, managing director of Welspun Global Brands. This strict hedging policy ensures that we have predictable revenues to a significant extent, she added.

Dilip Jiwrajka, managing director of Alok Industries, said the sharp depreciation of the rupee and problems of compliance of global safety standards by key competitor Bangladesh helped the country's exports earlier this fiscal. He said although the rupee has strengthened a bit recently, his company doesn't see much of a risk as of now. However, an upset equilibrium in the rupee movement may tend to hurt export prospects of companies in the sector, he said.

Alok Industries, the country's largest player having a strong presence across the textile and garment segments in the domestic market as well as export market, aims to raise its export revenue by around 80% to Rs 6,000 crore by the end of 2014-15.

Vardhman Group chairman SP Oswal said the stabilisation of the rupee is essential due to inherent nature of textile and garment businesses. A depreciation of the rupee may temporarily help exporters, but raw material costs will rise consequently, and so will labour costs in the very labour-intensive sector. These will ultimately hurt them. He, however, sees no harm to Vardhman from the recent appreciation and expects its exports to grow 7%, as forecast earlier, from over $300 million in 2012-13.

For gold jewellery exporters, already hit by a curb on raw material supplies, the rupee rise couldn't have come at a worse time, although major players are largely insulated due to hedging.

We see a slight increase in manufacturing cost. A sudden weakening of the currency also hits margins, said Sanjeev Agarwal, CEO at Gitanjali Export. The margins in gems and jewellery are anywhere between 2% and 15% depending on the type of jewellery and amount of value addition, so smaller players are badly hit.

Margins in electronics products depend on the imports and we have a high import intensity of close to 70%. Earlier the margins were 10-12% but now they have eroded to 5-6% only. Besides, our customers insist on getting discounts because our Chinese competitors offer discounts, said Suresh Madan, director, Ahuja Radios.

Ajay Sahai, director general and CEO, Federation of Indian Export Organisations, said till the time the rupee doesn't strengthen to be below 60 against the dollar, exporters will not be hit as other currencies too have moved moderately. It is a buyer's market when it comes to carpets and furniture. We make margins of 15-20% in the cottage industry but if the rupee appreciates further, the margins would fall to 10%, said OP Garg, MD of Overseas Carpets, which exports close to Rs 70 crore annually.

The present appreciation of the rupee will have limited impact. We export products worth Rs 450 crore annually and our major raw materials are copper and aluminium whose rates are decided in dollar terms, said Sunil Sikka, president, Havells India.