While frontline IT companies that are worried over a strong rupee eating into their export margins want the RBI to intervene to prevent the currency from appreciating further, another section of the industry seems to have a somewhat contrarian view on the matter. These firms whose top lines consist of domestic market sales rather than exports, would like the central bank to be mindful that its intervention in the currency market could fuel inflation and weaken local demand. From a macro perspective, they have warned that RBI?s intervention could defeat the purpose of market forces acting on their own and could cripple growth.
Infosys CFO V Balakrishnan on Friday had said that RBI should take a cue from China in learning how to curb volatility. With overseas inflows into equities already totaling over $22 billion this year, Infosys expects the rupee to appreciate 4.5% in FY11 compared to FY10, thereby shrinking margins.
?Most countries have taken steps. Japan and South Korea have intervened, Thailand has put a 15% withholding tax, Brazil has thrown in a 4% tax. The regulator should step in and support the currency, failing which, the export market will be destroyed,? Balakrishnan told FE.
But Balakrishnan?s statement has not met with universal acceptance. Said Rostow Ravanan, the chief financial officer of IT firm, MindTree, ?Tampering with interest rates and currency will affect growth, and hence should be left to market forces. If the rupee appreciates too much, exporters will clearly start to hurt. In that case, exporters will not be able to make sufficient profits, and they will scale back production, leading to lower employment. This means that the economy will slow down and money inflows into the country would also take a hit. The exchange rate, the interest rate and growth are an impossible trinity to manage at one go.?
According to Rostow, China, is a different ball game because it is a communist country and there is no capital convertibility. In fact on Sunday, China warned the US again not to use the dispute over the value of the Chinese currency, the yuan, as a ?scapegoat? for its high unemployment and flagging growth prospects. This came even as the US administration has delayed a politically volatile report on the Chinese currency. The report is expected to be critical of Beijing?s efforts to keep its currency artificially low.
N Venkatraman, head of strategic finance and risk management at IT firm Sonata Software too was of the view that India should not do what China and other emerging markets are doing. ?You can?t be protectionist all the time in a free market. But you should be protectionist to the extent that you should keep track of where the money is coming from,? he said. ?Even though you are not saying you are a completely free trading entity, I don?t think you should control the inflows,? he added.
Naveen Mathur, associate director ? commodities and currencies, Angel Broking, told FE, ?At Rs 44.50 to Rs 45, exporters will see a cut back in earnings. The rupee is expected to reach Rs 43 to Rs 43.50 levels on further appreciation, which is manageable. Things have been worse, say in 2007 when it reached Rs 38-Rs 39.?
More than currency fluctuation, experts felt inflation could be a far more dangerous demon to stem. Suresh Rao, group CFO of IT firm Mindteck said that while it is true that the RBI could stem the appreciation to some extent, it would fuel inflation. ?Appreciating rupee helps the government keep the inflation down,? he said. For instance the oil import bill, a trigger for inflation, will be in check, he added.