Exporters brace for further rise in rupee

Apparel, engineering goods and automobiles under pressure

Exporters are bracing for tough times with the rupee continuing to appreciate against the dollar, making India’s exports less competitive and reducing exporters’ margins.

“The worst is still to come. With the currency appreciating at a fast clip, the competitiveness of Indian goods will go down,” said Ajay Sahai, director-general of the Federation of Indian Export Organisations (FIEO). Major exporting sectors such as engineering goods, apparel and automobiles were expected to come under pressure, he added. 

The rupee has risen by 6.8 per cent against the dollar in 2017 to close at 63.64 on Tuesday. A stronger currency hurts exporters and makes imports, foreign travel and education cheaper.

Economists have predicted a further strengthening of the rupee and some of them said it would help the economy. “India is a net importer and a stronger rupee will help in reducing the trade deficit and keep inflation in check. The focus should be on specific sectoral intervention,” said Devendra Pant, chief economist at India Ratings & Research.

The FIEO estimates the rupee will continue to rise in value over the next six months because of large foreign portfolio investment inflows and will finally settle at Rs 62-60 to a dollar. This is due to the dim investment outlook for most developing nations while global capital pours into India at an unprecedented rate.

Foreign portfolio investors’ ownership of Indian equities reached a record during the quarter ending June as overseas funds continued to invest aggressively. Foreign portfolio investors own 27.5 per cent of the top 75 companies listed on Indian bourses, according to Morgan Stanley.

Since the currencies of competing nations like Bangladesh, the Philippines and Vietnam had depreciated, India’s exports would continue to lose competitiveness in the global market, exporters warned. The forward premium on many commodities has decreased in the past year.

However, with merchandise exports from the India Scheme covering nearly 8,000 product categories, further tariff support by the government was unlikely, an official said.

The introduction of the goods and services tax (GST) and the ensuing confusion over the operation of export-promotion schemes are worsening the prospects for exporters.

“Several government schemes for exporters have been turned upside down,” said T S Bhasin, chairman of the Engineering Exports Promotion Council.

These include duty-free imports of inputs under the “advance authorisation” scheme. Supply of goods to export-oriented units from the domestic tariff area are not considered “deemed exports” under the GST, Bhasin added.

An analysis of the 10 largest export-oriented sectors from CRISIL’s rated portfolio showed in late July that leather, textiles, meat, seafood and basmati rice were the most vulnerable to a stronger rupee.

“A majority of exporters have weathered the storm. Any significant rise in the rupee will affect the credit profiles of exporters in vulnerable sectors,” said Anuj Sethi, senior director, CRISIL. Exporters rated below ‘BBB-’ (moderate safety) are vulnerable to challenges on both the demand and supply sides.

A report by Singaporean lender DBS pointed out that gains made with regards to imports would also be substantial. This is important since the import content of exports increased to 25 per cent in 2010-11 from under 10 per cent in the 1990s. 

However, dominant sectors making up the export basket are within the traditional group of engineering goods, gems and jewellery, and textiles, which have low import intensity. These labour-intensive sectors are also more sensitive to rupee movements.