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Strengthening rupee set to hit exports hard

The rupee has been hardening consistently over the past nine months, recently touching 41 against the US dollar, bolstering national pride, report Deepak Joshi and Gaurav Choudhury.

business Updated: May 01, 2007 02:22 IST

There is always a flip side. The rupee has been hardening consistently over the past nine months, recently touching 41 against the US dollar, bolstering national pride, and foisting India into the elite league of trillion dollar economies.

But exporters are not happy, as their potential buyers suddenly find Indian goods much more expensive than they had expected. They have begun to look for new destinations to hedge receipts.

"Our export competitiveness has been affected both by the strengthening of the rupee and the slowdown in the United States," said A. Prasanna of ICICI Securities. "The real appreciation due to to nominal appreciation as well as higher domestic inflation."

With the Reserve Bank of India (RBI) limiting its intervention and allowing rupee to strengthen further in the new financial year, exports, specially that of low value-added goods, has been affected.

A Delhi-based economist said RBI has always insisted that imported inflation problems should be solved through fiscal measures, and its likely to stick with this stance. “But inflationary outcomes are likely to limit the Bank’s ability to intervene and can be a crucial determinant of the near term rupee outlook," he said. "Global outlook of gradual depreciation should also help the rupee sustain its appreciation. High oil prices, global risk aversion and measures to moderate external inflows all pose an upside risk."

“All considered, export growth is likely to remain in single digits in the next few months and the government target of $160 billion (Rs 656,000 crore) for 2007-08 appears difficult. With non-oil imports remaining strong given the underlying momentum in investment demand, net exports will continue to widen and subtract GDP growth,” Prasanna said.

A survey by the PHD Chamber of Commerce and Industry (PHDCCI) noted that some exporters, particularly of information technology (IT) services and textiles, have reported losses between the period of invoicing and realisation of proceeds due to appreciation of the rupee.

The textile industry, one of the largest employment generators in India, appear to be the biggest hit by the appreciation of the rupee and has reported a 6.3 per cent dip in exports during the last four months. Industry chamber Assocham felt the target of $160 billion for the current year would be difficult to meet in the wake of the appreciating rupee.

However, the impact of the hardening rupee on the India’s oil import bill has to be watched with caution due to volatility in the global crude oil prices. During the year, India‘s net import of crude oil and petroleum products grew by over 17 per cent to an estimated Rs 1,64,107 crore, accounting for 21 per cent of total imports.