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Home / Business News / Harder rupee, slower growth

Harder rupee, slower growth

Come April the rupee hardened almost every day until in a single month it gained 4.6 per cent and over the year 8.5 per cent, reports DH Panandiker.

business Updated: May 04, 2007 20:56 IST
DH Panandiker
DH Panandiker

It has happened so suddenly. Until March, the rupee was fairly stable at 43-44 to the dollar. Come April it hardened almost every day until in a single month it gained 4.6 per cent and over the year 8.5 per cent. That has changed the perspective for business and growth.

It is not against the dollar alone that the rupee has hardened, though the dollar has fallen against most other currencies. The rupee also gained 1.1 per cent against the euro in the last twelve months and remained nearly stable against the pound. This currency gain is not shared by our competitors in the international market. The Chinese yuan, for instance, hardened a mere 3.8 per cent against the dollar and actually weakened 4 per cent against the euro and 5.5 per cent against the pound. Broadly, the rupee appreciated against the yuan by 5 per cent making Indian goods, to that extent, more expensive for foreign buyers than Chinese goods.

The disadvantage is not restricted to the currency exchange rates alone. With inflation at 6 per cent in India and only 3 per cent in China, the additional handicap to Indian exporters would be 3 per cent. Over the year, and more particularly in April, India lost is competitive edge by about 8 per cent against China, 5 per cent from currency appreciation and 3 per cent from excessive inflation.

Obviously, our exports will not be able to keep up the 20 per cent growth that was actually realised in 2006-07. The Commerce Minister, however, has set a $160 billion (Rs 656,000 crore) export target for 2007-08, 28 per cent more than in the last year, possibly underestimating the hard-rupee effect. Foreign buyers are loyal to price and will quickly switch from India to, say, China. The fallout of strong rupee is weak exports specially to markets which are highly competitive.

The impact will vary from industry to industry. IT is an export industry deriving more than three-fourths of its revenue from exports. With the hardening of the rupee there was already considerable erosion of margins. We exported Rs 33,920 crores of apparel and Rs 12,900 crores of gems and jewellery to US and EU. With the harder rupee that export may be difficult to be maintained. This would also be true of carpets, leather goods, chemicals, etc.

Currently exports are about 12 per cent of the GDP. A drop in export growth from 20 to say, 10 per cent would result in a fall in GDP growth in 2007-08 by about 1 per cent. It is therefore necessary that the rupee goes back to 43-44 to the dollar as early as possible to maintain our competitive edge. That will not happen by itself. The RBI will have to intervene in the market even if this increases liquidity in the system. There are enough means to sponge out that liquidity. Left to the market, the pressure of hard rupee will be unreasonably severe.

ht epaper

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