While many exporters have never been happier thanks to the steep fall in the level of rupee to 60 per dollar, the Electronics and Computer Software Export Promotion Council (ESC) has urged policy makers to take a longer term view.
The association pointed out that while, in the short term, exporters will get more rupees for the same amount of dollar-denominated exports they make due to the devaluation, in the longer term, the benefits are negotiated away. It pointed out that buyers from foreign markets will negotiate to lower the dollar prices as well, trying to take advantage of fall in the rupee.
“The depreciation or devaluation of currencies would help in the export efforts by making the exportable products cheaper in the host country, is a misnomer,” said Vinod Sharma, Chairman, ESC. “The overseas buyer, most often, will re-negotiate the deals to share the advantages, even if the benefits are notional or marginal. This is true both in the commodity and services trade like software and services exports.”
Typically, in times of weak rupee, exporters and people who send money from foreign countries, such as overseas workers, are benefited hugely as most of India’s foreign trade is denominated in dollars, rather than in rupees. 95 per cent of India’s international trade is dollar denominated, according to ESC. The dollar has, in recent weeks, rallied against nearly all other currencies as money returns to U.S. investments such stocks and bonds.
The U.S. Federal Reserve has indicated that the economy is now sufficiently strong for it to stop printing dollars at a breakneck speed. As such, speculators believe the dollar, and U.S. markets, is poised for gains against other currencies and markets, prompting them to shift money from emerging markets to the United States.
This has led to a sharp dip of 5-15% in some emerging market currencies such as the Rupee and the Brazilian Real.
Typically, governments try to keep their currency at a low level so as to make their export items cheaper in foreign markets where they are sold in local currency.
Sharma, however said such celebrations are based on a false premise.
“A stable currency is critically important for a sustained pick up in the international trade,” he said. “Neither steep appreciation nor depreciation is desirable for a sustained growth in trade. Apart from its distortionary impact on the economy, a volatile currency triggers uncertainties and undue speculation, which in the long run, are not in the interest of a stable trade regime.
“Dollar fluctuations will have more impact on the value of the Indian rupee. We have to creatively think of widening the basket of currencies that the Indian rupee is linked with. Pound, Euro, Yen etc. are stable currencies. Therefore, traders should have increasing exposures in such currencies to avoid repercussions of volatility of the rupee vis a vis dollar,” he added.
Steep appreciation of the rupee will spell inflationary pressure in the economy since it would increase the project cost of imported capital goods and raw materials, D K Sareen, of the ESC said. “Many of our exports are import led. The general perception is that technology sector exports are less dependent on imports. But most of the platforms on which ICT sector operates, such as digital equipment, satellites, high end computers, telephony are imported, leading to cost escalation of export goods,” he added.
The ESC asked for stronger central bank intervention to prevent big movements in the value of the rupee. “For instance, rupee depreciates when there is a bunching of dollar payments for imports of oil or redemption of bonds etc. To a large extent, such payments can be foreseen and corrective measures taken well in time, such as RBI pumping more dollars in the market during that time to meet the excess demand to be mopped up later,” it said.