Why rupee fall is of no help to exporters this time
Exporters should have benefited from the depreciation of the rupee. But the sheer volatility of the rupee in the last few months has in fact
hurt those who hedged the currency and made long-term planning extremely
risky for all.
"I have the confidence to face life now," says Gouri, 24. She is deaf- mute, and uses sign language to communicate. The source of her confidence is her job at a factory in Kanchipuram, Tamil Nadu, 75 km southwest of Chennai, where, along with 2,000 other women, she stitches the seams of designer and sports bras, and earns a salary of around Rs 4,000 a month. She keeps back only Rs 500 for herself, sending the rest to her family in nearby Dharmapuri district. The bras she works on are all for export, going to global lingerie brands Victoria's Secret and La Senza, which sell them for $30 to $40 a piece.
With the rupee trading at more than 55 against the US dollar at present, compared to around 50 only months ago, every bra sold by the company is earning it more rupees than before. Other businesses may have been adversely hit, but surely the rupee's depreciation must delight exporters ? Not so. The sheer volatility of the rupee in the last few months has in fact hurt those who hedged the currency and made long-term planning extremely risky for all. If the trend continues, hundreds of thousands of people from the poorest sections, who like Gouri have been empowered by their jobs with export units, face an uncertain future.
"With the depreciation of the domestic currency, exports are expected to get a boost because our goods become cheaper in international markets," says Jyotiraditya Scindia, Minister of State for Commerce and Industry. But the matter is not as simple. "No exporter is happy with the weakening rupee," says Rafeeque Ahmed, President, Federation of Indian Exports Organisations. Why not? "We are scared," says Ludhianabased Rajnish Ahuja, who has been exporting engineering goods for nearly three decades. "Foreign buyers are very smart. They are asking for a 10 per cent discount now. But if the rupee appreciates tomorrow, we are worried they will want the discount to continue."
Discount dilemma
Given the narrow margins - which have shrunk from around 10 per cent to three to five per cent in the past year - being generous with discounts is not possible. But customers who ask for them cannot be dismissed either, given the growing competition India faces in the global market, with new suppliers like Poland and Slovakia jostling for the same space. "The average Indian exporter does not have the same bargaining power as before," says Ahuja. "We have competition from everyone. Those days when our only rival was China are gone."
Given the volatility of the rupee, the Reserve Bank of India (RBI) has been encouraging exporters to hedge - or seal contracts to supply goods at a pre-determined exchange rate for a future date, irrespective of what the market price then is. But most exporters - 60 per cent of whom are small and medium enterprises (SMEs) do not have the expertise to calculate risk and hedge profitably. "SMEs cannot afford treasury managers to advise them on hedging as they work on small margins," says Jagannadham Thunuguntla, Chief Strategist and Head of Research at SMC Global Securities Ltd.
The ones who have hedged are mostly making do with whatever advice they get from their banks. At the behest of Saraswat Bank, for instance, Pankaj Chaddha, owner of the Mumbai-based Jyoti Steel Industries which exports steel wires and bars, hedged orders at Rs 50 to Rs 53 against the dollar from April to June this year. From July, he is hedged at Rs 57 to the dollar. But the dollar is already above Rs 55 and if it stays that way till June-end, Chaddha stands to lose. "When I hedged, Rs 50-53 looked nice," he says. "But when I look at Rs 55 today, I feel I'm missing out. The way things are going I feel it is better not to hedge at all. If the government takes some decision and we are back at Rs 50, I'll have to pay the difference."
The central bank has already begun tinkering with the foreign exchange market to arrest the rupee's fall. Analysts believe some appreciation may shortly follow: Barclays on May 25 forecast that the rupee would touch 52 against the dollar in six months, while Citigroup in the same week said it would be at 54.8 by March 2013 and 51.50 a year later. This may bring further losses to those who have hedged. "The instability is like playing Russian roulette," says Chaddha.
Stocking up
Finally, for many exporters, the rise in import costs of raw material offsets any export gains from the depreciating rupee. "A depreciating rupee will benefit those exporters whose product has a low imported component," says K.T. Chacko, Director of the Indian Institute of Foreign Trade.
Exporters of gems and jewellery, for instance, import 90 per cent of their input. Some engineering goods also rely heavily on imports. Some of these exporters have tried to protect themselves by stocking up, but this option is not available to those who import - or manufacture - perishable commodities. The Jaipuria group's Gurgaon-based Varun Beverages Ltd, India's largest bottler of PepsiCo's drinks, for instance, imports a key component of the PET bottles it manufactures. But since PET bottles have a short shelf life, importing too much at a time is pointless.
Input costs for the company have nearly doubled in the past year, primarily due to the weakening rupee. "It has had a high impact on our margins", says Chris White, President and CEO, Varun Beverages. Exporters who do not need to import include those in the handicrafts, agriculture and software sectors.
But they have other problems: agriculture is hemmed in by excessive regulation, handicrafts by inadequate branding support from the government, and software by the bleak economic scenario in the West which has led most information technology companies to project a modest outlook for 2012/13.
Bleak environment
Long term contracts have also become a no-no, particularly in the engineering sector, which was formerly used to long-gestation contracts. "At best I am committing for a quarter," says Rakesh Shah, Chairman of the Engineering Exports Promotion Council, who also heads the Kolkata-based Nipha Group, manufacturers and exporters of machinery equipment. "In January, I did get into an annual contract, but no more. In normal circumstances we book for 60 per cent of the year, and are booked seven to eight months in advance. But now growth has reached a plateau." Shah has also hedged, but it has brought him no advantage: the rupee repeatedly fell lower than he expected.
Add to this the overall economic scenario which shows no signs of improving: India's gross domestic product (GDP) growth in 2011/12 slipped to 6.5 per cent from 8.4 per cent the previous year, the fiscal deficit, at 5.9 per cent remains wide, while the current account deficit (CAD) - the excess of imports over exports - is likely to be 3.8 per cent of GDP this year, the highest ever, according to C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council. Economists have identified the rising CAD as a key reason behind the rupee's fall. Above all, the euro zone crisis remains alarming, reducing demand in the affected countries. "Export outlook is currently subdued given the global uncertainties and the macro-fundamentals of the economy," says minister Scindia. "As regards export performance in the coming quarters, the global economic outlook will be a major determinant."
He also insists on the need for a foreign trade policy that is in tune with the changed realities of the world. "We must revitalise exporter confidence and bring about changes for optimising export growth," he says. Exporters can only hope he means it.
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With the rupee trading at more than 55 against the US dollar at present, compared to around 50 only months ago, every bra sold by the company is earning it more rupees than before. Other businesses may have been adversely hit, but surely the rupee's depreciation must delight exporters ? Not so. The sheer volatility of the rupee in the last few months has in fact hurt those who hedged the currency and made long-term planning extremely risky for all. If the trend continues, hundreds of thousands of people from the poorest sections, who like Gouri have been empowered by their jobs with export units, face an uncertain future.
Export outlook is subdued given the global uncertainties and the macrofundamentals of the economy: Jyotiraditya Scindia
Discount dilemma
Given the narrow margins - which have shrunk from around 10 per cent to three to five per cent in the past year - being generous with discounts is not possible. But customers who ask for them cannot be dismissed either, given the growing competition India faces in the global market, with new suppliers like Poland and Slovakia jostling for the same space. "The average Indian exporter does not have the same bargaining power as before," says Ahuja. "We have competition from everyone. Those days when our only rival was China are gone."
Given the volatility of the rupee, the Reserve Bank of India (RBI) has been encouraging exporters to hedge - or seal contracts to supply goods at a pre-determined exchange rate for a future date, irrespective of what the market price then is. But most exporters - 60 per cent of whom are small and medium enterprises (SMEs) do not have the expertise to calculate risk and hedge profitably. "SMEs cannot afford treasury managers to advise them on hedging as they work on small margins," says Jagannadham Thunuguntla, Chief Strategist and Head of Research at SMC Global Securities Ltd.
The ones who have hedged are mostly making do with whatever advice they get from their banks. At the behest of Saraswat Bank, for instance, Pankaj Chaddha, owner of the Mumbai-based Jyoti Steel Industries which exports steel wires and bars, hedged orders at Rs 50 to Rs 53 against the dollar from April to June this year. From July, he is hedged at Rs 57 to the dollar. But the dollar is already above Rs 55 and if it stays that way till June-end, Chaddha stands to lose. "When I hedged, Rs 50-53 looked nice," he says. "But when I look at Rs 55 today, I feel I'm missing out. The way things are going I feel it is better not to hedge at all. If the government takes some decision and we are back at Rs 50, I'll have to pay the difference."
The central bank has already begun tinkering with the foreign exchange market to arrest the rupee's fall. Analysts believe some appreciation may shortly follow: Barclays on May 25 forecast that the rupee would touch 52 against the dollar in six months, while Citigroup in the same week said it would be at 54.8 by March 2013 and 51.50 a year later. This may bring further losses to those who have hedged. "The instability is like playing Russian roulette," says Chaddha.
Stocking up
Finally, for many exporters, the rise in import costs of raw material offsets any export gains from the depreciating rupee. "A depreciating rupee will benefit those exporters whose product has a low imported component," says K.T. Chacko, Director of the Indian Institute of Foreign Trade.
When I hedged, 52-53 looked nice, but when I look at Rs 55 today, I feel I missed out. If the government takes some decision and we are back at Rs 50, I will have to pay the difference: Pankaj Chadha
Input costs for the company have nearly doubled in the past year, primarily due to the weakening rupee. "It has had a high impact on our margins", says Chris White, President and CEO, Varun Beverages. Exporters who do not need to import include those in the handicrafts, agriculture and software sectors.
But they have other problems: agriculture is hemmed in by excessive regulation, handicrafts by inadequate branding support from the government, and software by the bleak economic scenario in the West which has led most information technology companies to project a modest outlook for 2012/13.
Bleak environment
Long term contracts have also become a no-no, particularly in the engineering sector, which was formerly used to long-gestation contracts. "At best I am committing for a quarter," says Rakesh Shah, Chairman of the Engineering Exports Promotion Council, who also heads the Kolkata-based Nipha Group, manufacturers and exporters of machinery equipment. "In January, I did get into an annual contract, but no more. In normal circumstances we book for 60 per cent of the year, and are booked seven to eight months in advance. But now growth has reached a plateau." Shah has also hedged, but it has brought him no advantage: the rupee repeatedly fell lower than he expected.
Add to this the overall economic scenario which shows no signs of improving: India's gross domestic product (GDP) growth in 2011/12 slipped to 6.5 per cent from 8.4 per cent the previous year, the fiscal deficit, at 5.9 per cent remains wide, while the current account deficit (CAD) - the excess of imports over exports - is likely to be 3.8 per cent of GDP this year, the highest ever, according to C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council. Economists have identified the rising CAD as a key reason behind the rupee's fall. Above all, the euro zone crisis remains alarming, reducing demand in the affected countries. "Export outlook is currently subdued given the global uncertainties and the macro-fundamentals of the economy," says minister Scindia. "As regards export performance in the coming quarters, the global economic outlook will be a major determinant."
He also insists on the need for a foreign trade policy that is in tune with the changed realities of the world. "We must revitalise exporter confidence and bring about changes for optimising export growth," he says. Exporters can only hope he means it.
