Currency impact: A burnished rupee takes polish off jewellery exports

A burnished rupee takes polish off jewellery exports

The second of a four-part series on the impact of a strong rupee on key export-oriented industries looks at the jewellery sector

The rupee’s five per cent appreciation against the dollar has changed the dynamics of jewellery exports from India.

The change is significant, especially in the context of jewellery players facing headwinds with intermittent recovery in demand, both in domestic and overseas markets.

Ninety per cent of the raw material cost is dollar-based or import-driven.

Since the Rs 3.75-lakh crore jewellery industry in India has profit margins of four to five per cent, the rupee appreciation can potentially wipe off the entire profit.

“Exporters who are supported to get paid at the end of the financial year will be adversely impacted as their income will decline in proportion to the rupee appreciation. They will have to take a hit on profitability,” said Rajiv Popley, director, Popley & Sons, a gold and diamond jewellery manufacturer and exporter.

However, exporters can mitigate some pain arising out of this. For example, exporters are delaying their receivables for the goods they had shipped 120 days ago. Secondly, the high cost of raw materials gets partly offset (against profits) on their books for 2016-17.

By the end of the 120-day cycle, raw material procurement will be cheap because the rupee has appreciated.

Also, jewellers have turned their attention to local markets by luring customers through discounts. 

The silver lining is that many jewellery manufacturers and exporters have opened a dollar-denominated account, and also prefer to borrow working capital (money) in dollars. This protects them from rupee volatility on either side. Since the bills are made when consignments are prepared for exports, receivables come directly to the dollar account. Raw materials such as gold, diamond, colour gemstones and other precious metals are imported. These contribute around 90 per cent of the cost of ornaments. So, only 10 per cent of the value of goods consists of value addition, the key risk which is hedged.

“So the component of value addition would get impacted in proportion to the appreciation of the rupee,” said Rajesh Mehta, managing director, Rajesh Exports, which is a listed firm.

While hedging gives protection, it also comes at a cost. During periods of increased volatility such as now, the hedging cost also tends to rise, thereby impacting margins. The bigger worry, however, is for those who don’t hedge. “There are some players who, despite all facilities granted by the government, remain unhedged. Those who do not open their dollar accounts and continue to deal in rupees will be impacted (as the rupee has appreciated against the dollar). Since they purchase raw materials in advance at a lower value of the rupee against the dollar, their profitability gets impacted,” said Praveen Shankar Pandya, chairman of the Gem & Jewellery Export Promotion Council.

However, Pandya says the number of such players and the amount of jewellery traded could be lower. Hence, the impact of the rupee volatility on the jewellery sector will be minimal. Mehta says there is a positive side to the rupee’s appreciation. “The appreciation will make precious metals and stones cheaper in India, thereby translating into higher than normal sales.” 

While the rupee’s volatility is a worry, there are bigger headwinds. Jewellery exports from India, which contribute nearly 13 per cent of merchandise exports, have faced huge problems ever since the UAE imposed the five per cent import duty. This came into effect on January 1. While exporters are awaiting the final decision on the rate under the goods and services tax, the medium-term sentiment is far from being encouraging for the jewellery sector.

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