RBI steps in to stem rupee depreciation
It seems there are no easy gainers in India from the rupee's depreciation this week. Not even exporters.business Updated: May 11, 2012 00:43 IST
It seems there are no easy gainers in India from the rupee's depreciation this week. Not even exporters.
Ashok Taneja, CEO, Shriram Pistons and Rings, whose company exports to the US and Europe, was unexcited on Thursday as the Indian currency clawed back from Wednesday's all-time low. The rupee gained some strength as the Reserve Bank of India announced measures to stabilise it.
Taneja says any benefits from the rupee depreciation to manufacturers like him are offset by the increased cost of imports of raw materials. Besides, he adds, payment contracts are structured in such a way that an appreciation or depreciation of up to 5% is simply overlooked."In the short term exporters get a leeway as the rupee touched an all time low but there is a mechanism in place that if there is a fluctuation up to 5% either way, between the time the contract is signed and the goods delivered, neither customer nor exporter will demand the price correction," he said.
Hopefully, Taneja's contractual 'circuit-limit" may not be breached in a hurry, as the RBI intervened early on Thursday to stem the rupee which on Wednesday closed at an all-time low of 53.85 against the dollar.
The RBI asked exporters to sell 50% of retained foreign exchange earnings, a move likely to infuse around $2-3 billion in the system within a fortnight.
"It has been decided that 50% of the balances in the Exchange Earners' Foreign Currency Account (EEFC) accounts should be converted forthwith into rupee balances," RBI said.
The amount should be credited to the rupee accounts as per the directions of the account holder, the notice added.
The measure had a limited impact, as the rupee appreciated to 53.43, after an intra-day high of 53.02
Under current EEFC rules, exporters are allowed to retain 100% of their earnings in foreign currency. The account holders do not have to convert foreign exchange into rupees and vice versa, thereby minimising transaction costs.
The central bank has also fixed limits on intra-day trading of foreign currency by banks. "The RBI's measures will slightly reverse near-term pressure on the Indian rupee to weaken but neither fixes the underlying problems that are causing the rupee to depreciate," said Rajeev Malik, senior economist, CLSA.
Experts say that issues like high Current Account Deficit (CAD) and outflow of funds by Foreign Institutional Investors (FIIs) because of uncertainty surrounding Eurozone crisis will continue to bear down on the rupee's value vis-à-vis the foreign currencies.
"In the short term rupee may bounce back a bit but in medium term the trajectory of the Indian currency will depend on factors such as policy actions taken by the government going forward to check high CAD and increase FII inflow in the country," said Rohit Bammi, partner, KPMG. "After sharp volatility witnessed in last six months, it very difficult to predict the any level for rupee," he said.