As per RBI index, the rupee was still 'over-valued' by almost 16% in April among 36 currencies
A 5.6% depreciation of the rupee against the greenback since January has hardly come as a solace to exporters, as they struggle to cope with an unprecedented cancellation of orders following demand crash in the wake of the Covid-19 outbreak and patchy implementation of the home ministry’s lockdown orders by states to facilitate the resumption of manufacturing.
Importantly, according to the RBI’s real effective exchange rate (REER) index, based on the export-weighted average of 36 currencies, the rupee was “over-valued” by almost 16% in April, despite the depreciation in recent months. The domestic currency had remained overvalued by just over 16% in FY19 and close to 20% in FY20, according to the index.
As such, fresh orders from the EU and the US, the top two markets that have borne the maximum brunt of the pandemic, are barely flowing in, exporters told FE. Merchandise exports contracted by as much as 35% in March and 60% in April.
Currencies of some of India’s competitors, too, have weakened against the dollar, blunting the advantage for New Delhi. The Malaysian ringgit has depreciated by 5.9% since January, while the Indonesian rupiah has dropped by 5.1%. The Singapore dollar and the Pakistani rupee have weakened by 4.7% each.
In software services exports, roughly 28% of payments are made in currencies other than the dollar.
According to Ravi Sehgal, chairman of the engineering exporters’ body EEPC, since hardly any exports are taking place, the rupee depreciation doesn’t count much. Engineering goods are the largest segment, making up for over a quarter of the country’s goods export basket.
Although the Bangladeshi rupee has held steady and Vietnam’s currency has weakened only by 0.5% against the dollar since January, they enjoy much greater cost advantage than India in labour and logistics. Also, Bangladesh has duty-free access to the US and the EU markets in garments, while Vietnam, with its attractive incentives, has already emerged as a major electronics export hub, leaving India far behind.
Also, as pointed out in an earlier report by HSBC, India’s domestic bottlenecks explain 50% of the recent slowdown in overall exports (remaining the biggest threat to its outbound shipments), followed by world growth (33%) and the exchange rate (just 17%).
Similarly, according to an earlier Nomura report, every 1% depreciation in the REER raises export growth by just 0.9 percentage point in the same quarter, whereas every 1% of global GDP growth drives up export growth by 2.7 percentage points with a lag of one quarter. This means global growth can potentially create more export opportunities for India than its currency depreciation.
The International Monetary Fund (IMF) has predicted a 3% contraction for 2020 global GDP, warning that the Covid-19 outbreak has plunged the global economy into its worst recession since the Great Depression in 1930s. The WTO, too, has warned that global trade volume growth could crash in the 13-32% range in 2020. These would weigh on the Indian exports as well.
The US, the EU and China made up for 40% of India’s merchadise exports. Also, the US (and Canada) and Europe made up for 61.2% and 25.6%, respectively, of India’s software services exports worth $118 billion in FY19, according to a RBI report released in November 2019. Of course, the dollar still is the prefered currency, with a 72% share.
However, the much bigger worry for the exporters is the potentially massive demand slowdown due to the pandemic. In such a case, the currency relief is hardly any solace, exporters stress.
Global supply chain has been hit hard, cargo movement has been affected, shipping lines altered and warehouse capacity stretched, they say.
Already, as many as 58% of the 103 respondents in a survey by CARE Ratings suggest exports will contract in FY21 following the covid-19 outbreak, with sectors such as tourism, aviation, auto, electronics and metals facing the maximum risk.
FIEO president Sharad Kumar Saraf has already cautioned said: “The MSMEs particularly in employment intensive sectors like carpets, handicrafts, apparels, footwear, gems and jewellery, marine and perishable with their major market in Europe and the USA are likely to be worst affected particularly in first quarter of FY21, as per the current trend.” Gupta has called for an immediate package for the exporters to reverse the slide. At the same time, he has stated that the government’s move to help MSMEs through guaranteed and collateral-free loans (additional) of Rs 3 lakh crore will help small exporters as well.