Trend Watch: Rising Rupee will continue to distress exporters, IT ...

Myiris.com - India
They are also trying to reduce their costs through better inventory
management, logistics and administrative expenses management. ...

Recent developments in the exchange markets, particularly sharp Rupee appreciation against greenback in very short period, has evoked sharp reactions from exporters and experts. Rupee is currently hovering around 40.50 - 40.85 a Dollar stronger than 47 a Dollar in July`06. In the current year, it has already appreciated over 8.5%.

Rakesh Mohan, deputy governor of Reserve Bank of India, this week (May 16, 2007) affirmed that the bank`s intervention in the forex market was minuscule, and further admitted that the bank is facing problems of liquidity management because of surplus capital flows in the past six months. It caused the Rupee to close at a nine-year high of 40.78/79 a dollar on the day. He also stated that the turnover in the foreign exchange market surged to USD 6.5 trillion in 2006-07 from USD 1.3 trillion in 1997-98.

Until the end of February, RBI intervened in the currency market to cap the Rupee gains against Dollar. However, it fueled inflation. But, RBI`s priority to liquidity management and price stability over exchange rate management has weakened the possibility of its step-up in currency market, fueling further the Rupee sentiments.

This Rupee appreciation is beneficial for importers, as fewer Rupees can buy the same Dollar denominated assets/commodities/goods. Hence, companies from energy dependent sectors will be on better side (energy, paints and few textile majors). Sectors like oil and gases, automobile, engineering and aviation will be gainers. Rising value of Rupee will have a positive impact on oil marketing companies (OMCs) in India, as their procurement prices are benchmarked to international product prices, denominated in US Dollars. Moreover, stronger Rupee will make it easier to import cement, giving comfort to construction companies. The appreciation is also a positive for the government`s financials and capital goods sector because most of the equipments are imported.

On the other hand, appreciation of the Indian unit is adversely affecting revenues and margins of exporters as US Dollar is the currency in which most of the billings for exports is done.

In its recent export survey, FICCI has noted that as Dollar is depreciating, Euro is becoming the most preferred currency for Indian exporters if they are given a choice to shift their transaction currency. However, at present it is not possible for exporters to do so. For certain commodities, international trade is conducted only in Dollars. Various measures that exporters plan to save themselves include cost cutting, renegotiating contracts (including protective clauses) and looking for untapped markets.

Some suggestions regarding the support from government like export financing in foreign currency, increase in DEPB (duty entitlement passbook scheme) rates, decreasing the custom duty on import of capital goods to 0% were given by the exporters.

To minimize losses some exporters are selling forward their Dollar receipts. They are also trying to reduce their costs through better inventory management, logistics and administrative expenses management.

Even so, it seems that Indian exporters and selected companies can`t escape from their unpleasant fate. Bhupendra Sharma, vice president, Hornic Investments said, ``
The present appreciation will affect export-oriented firms and those engaged in outsourcing business``. Rupee appreciation is holding stocks prices back, he added while observing that despite of good corporate results, the stock price of Infosys is not marching ahead.

Similarly, Networth Stock broking firm, in its recently released weekly outlook report, mentioned that the IT sector has concerns mounting for the same reason. Each percentage of change in Rupee will impact the EBITDA margins of the IT companies by around 30-40 bps. From those levels, most companies have taken a serious hit in their stock prices. The companies have a mechanism of hedging the currency at almost 50% of their revenues. Most companies have done that and as a result, the impact is less severed than what it looks on the face of it. However, if we do not see the Dollar strengthening or an intervention by RBI to control a rising Rupee, we may see a further
downward rating of most of the IT companies.

Going ahead, market currently expects the continuation of this appreciation especially after the central bank of China expanded the bank for its currency against US unit, which will allow appreciation of the Chinese currency on May 18. Thus, exporters and IT sectors have to live with this harsh reality!