A 6.9% depreciation of the rupee against the greenback since January will “certainly help” exporters but a potential demand slowdown in key markets — mainly the US and the EU — due to recession fears has turned out to be a major worry for them. The rupee recovered 8 paise to settle at 79.91 on Friday, having almost hit the psychological 80-per-dollar mark on Thursday.
Exporters that FE spoke to also stressed that currencies of some of India’s competitors, too, have weakened against the dollar, blunting the advantage for India. For instance, the South Korean won has depreciated by 10.3% against the greenback since January, while Bangladeshi taka weakened 8.3% and Malaysian ringgit by 6.4%. The greater fall of the currency of Bangladesh, India’s biggest competitor in garments, on top of its duty-free access to the US and the EU markets, will substantially bolster its export competitiveness. Of course, the currencies of countries like Indonesia, Singapore and Vietnam have depreciated at a slower pace than the rupee. However, Vietnam, particularly, enjoys greater cost advantage than India in labour and logistics and with its attractive incentives, it has already emerged as a major electronics export hub, leaving New Delhi far behind.
Moreover, import-sensitive export segments, including petroleum, gems & jewellery and even electronics, will face upward pressure on input costs, said the exporters.
The order flow from the US and the EU has already started to slow down in certain segments—a sign that may get more pronounced in the coming months. The two markets alone made up 31% of India’s merchandise exports in FY22. Also, the US (and Canada) and Europe (including the UK) made up 56.2% and 30.1%, respectively, of India’s software services exports worth $134 billion in FY21, according to a RBI report released in September 2021. Of course, the dollar still is the preferred currency, with a 72% share.
Ajay Sahai, director general of the apex exporters’ body FIEO, said: “The depreciation has to be seen in perspective. The currencies of many of our competitors have depreciated against the dollar at a faster pace than ours.”
“Moreover, exporters are facing a triple whammy. First, there seems to be a consumption shift towards services from goods. Second, given high inflation across countries, purchasing power of consumers (in key markets) has been hit. Third, inventory level of domestic exporters remains high,” Sahai said.
Narendra Goenka, chairman of the Apparel Export Promotion Council, said: “Demand for garments from the US is expected to drop by 10-15%, as stores there are selling less. The rupee depreciation will definitely help but demand slowdown is expected to be sharper. Moreover, buyers are offering lower rates for products. Some relief is coming from the raw material front, as prices (of cotton, yarn, etc) have come down recently, albeit to a very limited extent, and they are still way above the usual level.”
R Uday Bhaskar, director general at the Pharmaceutical Export Promotion Council, said: “The rupee depreciation will offer some relief but at the same time, the pharmaceutical industry imports inputs worth about $6 billion a year. So, on these imports, we have to pay more. Of course, the exports are higher —$24.5 billion in FY22.”
The World Trade Organization in April slashed its merchandise trade volume growth forecast for 2022 to 3% from its previous prediction of 4.7%. It also expects only 3.4% growth in 2023. There are apprehensions that that global trade body may further trim its forecasts. This will impact India’s export prospects as well.
According to an earlier Nomura report, every 1% depreciation in the REER (the RBI’s real effective exchange rate index, based on the export-weighted average of dozens of currencies) 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 or lack of it can potentially impact export opportunities for India than its own currency movement.