The upward march of Indian Rupee seems unstoppable. The ascent which started in late 2006 picked up in 2007 and accelerated since January 2007 even at a faster rate. Since April this year, Indian Rupees has appreciated by mighty 15% in relation to US dollar, which has surpassed all estimates and projections.The appreciation of Rupee was so sharp and spontaneous that within less than a week after the Rupee broke the phsycological40-marks vis-à-vis US dollar, it managed to even breach the 39.50 mark. It rose to afresh nine-anda- half year high of 39.36 level before ending the day weaker at 39.49/50. Treasury managers say RBI did step into buy dollar when the Rupee touched 39.38 levels. However, the amount which entered the system through investors was so large that RBI was unable to protect any particular level

So massive has been the dollar inflow during the current year that within the first seven months of the year, the RBI has bought dollars worth $38.1 billion. Over the past one week too, RBI has intervened aggressively in the forex market. This failed to rein in the galloping appreciation. Further when RBI intervenes to buy dollars, it ends up infusing more rupee funds into the system, which only adds up to inflationary concerns.

If the knowledgeable sources are to be believed, there are no signs of any let up in the immediate near or even foreseeable future. In fact, the forex traders expect the rupee to touch 38.50 levels against the dollar by December 2007. The Rupee could rise further, on the back of strong capital inflows, despite the intermittent volatility and the current situation in the US, which is causing the dollar to depreciate. According to Puneet Chaddha, Country Head, Commercial Banking, HSBC, “The Rupee depreciating in the near future is unlikely.” Hitendra Dave Co-head of the global Markets, HSBC said ,”That the Rupee would continue to appreciate in times to come and according to HSBC by the end of the FY08 Rupee would be around 38.5 and by the FY09 at 39.”

IMPACT ON EXPORTS

Exports have been impacted; and the exporters have, in unison, given fullthroated expression to their anguish at the vanishing of thin margins of profits they have been working on. Reflecting a sharp fall in exporters’ earnings, Exports grew just 4.31 percent in Rupee terms in August against a 34.88 percent increase in August 2006.

Meanwhile, the trade deficit has widened to an unprecedented level at the back of rising imports. Imports during August grew 32.64 percent to $19.56 billion as against 18.76 percent in the same month previous year. Overall, in the April- August period, India imported goods worth $91.98 billion and exported goods worth $59.48 billion, widening the trade deficit to $32.50 billion, a massive increase of 63.15 percent According J P Morgan Senior Economist Rajeev Malik, the Indian export growth will be hit in the months ahead owing to softening demand in the US as a result of the sub-prime mortgage crisis,

IMPACT OVER TEXTILES AND GARMENTS EXPORTS.

Let me acknowledge, the latest figures relating to August, 2007 are not available in so far as the exports of textiles and garments are concerned, which is in consonance with the fact admitted by the Government itself in the course of recently held Texsummit 2007 when it recommended “An institution to be established for collection of data relating to textile and apparel industry….” However, whatever figures are available for the export of textile and garments, only proves that export have declined in the current fiscal.

OPTIONS AVAILABLE TO GARMENT EXPORTERS

In the course of a recent meeting of best mind of business at ET Intelligence Group Knowledge Forum on “A strategic approach to Managing the Rising Rupee” various suggestions were thrown up, which we would examine in the context of our limited requirement of textile and garment exporters.

BILLING IN OTHER CURRENCIES

The knowledge Forum discussed, among others, sectors like textiles and others small exporters who also have been adversely affected by the currency appreciation. Saraf of Technocraft Industries which derives close to 96% of its revenues from export, said, “We are Rs. 400 crore export group dealing with 60 countries in over 35 currencies. Earlier, a majority of our business was in dollars, but we have managed reduced it to 25%. We never developed full scale risk management system so far, but now the time has come to look at it and we will come up with full-fledged risk management system in the time to come.” But the difficulty in this case is that the most of the exporters have been following the tradition of billing in US dollar even for non US-territories, though some of them have now been billing in euro and other currencies. True, it is for exporters, exporting to other countries other than US to deal in more stable currencies like euro, but since the US is the major market for India, the exporters exporting to the US would need to persuade the American importer to agree to invoicing being done in euro, but that seems hardly likely. Small and Medium exporter neither have the knowledge nor the means to have the hedging system in place. This proposition could be good one for large corporates or big export houses.

TRANSACTION IN RUPEE TERMS

In the course of the knowledge Forum, it was suggested that when revenue is in dollars and the cost is in Rupees, and the Rupees strengthens, margins shrink. To avoid this kind of risk one can try to get overseas clients to accept contract in rupees terms.

This Suggestion cannot be adopted for the deals already entered into between Importers/retailers and their Indian vendors for the simple reason as to why the importers would agree to pay more dollars than what has already been negotiated. Importers/retailers, I trust, don’t believe in charities, while asking anything beyond the contracted terms and conditions would constitute. However, in so far as the future contracts are concerned, Indian vendors could certainly try, but the points is, will the importers agree to that kind of
conditionalities, knowing fully well that Indian Rupees is in for a long ascent.

OPERATING CURRENCY WITHIN A BAND

Another suggestion at the Knowledge Forum was at that both the parties i.e. retailer and vendor could base their agreement on an agreed band of currency prices. If this could be put in to operation, it will be really good, but would the retailer agree to unforeseen risk of paying up more than what is available a fixed rate from other vendors in other countries. Today, we are living in buyers market and it will be naïve to expect that under the present situation of cut throat competition, the retailer/importers would be happy to tie up a secure commitment than to undertake a floating or fluctuating rate, which, they know is more likely to
work against them.

DEFERRING EXPORT RECEIVABLES

A suggestion emerging in the discussion was that companies should also look at deferring their export receivables to match the movements in the currency. This could mean booking higher receivables at the favourable rupees rates and deferring same at unfavourable rates.

This could be a good point in the heat of a discussion, but would it hold on in the present scenario when there are no prospects of southward march of Indian Rupee. Indian exporters and vendors will have to wait for a long, indeed a long time, before the tide against the Indian Rupee appreciation would sway. No exporter or vendor can really block a very major part of his receivables for such a long time.

CURRENCY SWAP

Yet another suggestion was “If the company has Rupee liabilities, it should swap them in dollars, as this will help them to reduce their liabilities.” This could be a useful suggestion, but will have only limited application , since it presumes that a company has to have some rupee liabilities, which may not be the case withmost of the exporters/vendors.

DOLLAR LINKED SALARIES

There were number of suggestions, essentially based on linking salaries with dollars. One of them was on the possibility of the companies having contracts with employees, who accommodate dollar movement, either up or down, in their compensation. Yet another option was to offer employees a certain percentage of their salary in dollars.

The suggestion are devoid of any thoughtfulness or logic or even practicality for a number of reasons. Why should employees accept an arrangement when they know that the real money value in terms of US dollars is certain to decline as there are no prospects in immediate or near future for US dollar to stablise or appreciate , given its home conditions. Even if it to be presumed that some employees might like to get part payment of their compensation in US dollars, which they can use for their holidays abroad, but their number would be quite limited. In fact, there are far better chances for exporters/vendors to make use of US dollars for n number of things including cheaper accessories or other material. From US other countries against dollars received by them.

PUSHING BALL IN RBI’S COURT

Having failed to fix the problem, thespeaker did try to push the ball in the RBI’s court by stating that RBI could give flexibility for managing treasury and provide more customer friendly solutions. What they had in mind while making this suggestion was not clear. It is better to leave the ball in someone else’s court when the going gets difficult.

HEDGING STRATEGIES

Though hedging could be best, even if not the only remedy, its usefulness is seriously conditioned by the fact that by far most of the exporters and vendors are tiny and small and some medium, which individually neither have the information or knowledge or financial means to get the right mix of the policies to save them selves from the vagaries of appreciation of Indian Rupee which is likely to only further firm up even up to Rs 39 to a dollar. The solutions thrown up at Economic Times Intelligence Group Knowledge Forum could hardly be considered as the solution to the problem of continuously appreciation of Rupee: and the textile and the garments exporters continue to put up with triple whammy.

TRIPLE WHAMMY

The textile and the garment exporters have been subjected to very difficult situation. On the income side, every dollar worth of exports fetches him fewer rupees on account of the appreciation of Indian Rupees with each passing day, while on the expenditure side; the same rupee earned buys lesser quantity of goods and services back home due to consumer price inflation ranging from 6.4 percent to 8.8 percent. What makes the position even worse is the fact that currencies of competing economies like Pakistan And
Bangladesh have not appreciated at all, particularly in terms of US dollars. The chart below brings out the gravity of injury to the Indian textile and garments exporters in terms of appreciation of Indian Rupee vis-à-vis Dollar, Pound and Euro: Indian textile and garments exporters thus have suffered triple whammy on account of (i) steep and continuing appreciation of Indian rupee, (ii) Increase in consumer price inflation increase at home and (iii) nonappreciation of competing currencies .The inevitable decline in exports followed; with study and mounting layoffs and retrenchment in the textile and garments sector. There was a hue and cry from the exporters and the trade bodies. The decline in export in export scurried the Government for some measures like, to start with, a half-hearted measure of mopping up extra inflow of US dollars to a buy –out of US dollars or even encouragement to investment aboard, but the avalanche of US dollar proved to be too big to handled by such measures. The long time consultation between the Government, RBI and SEBI could discover the only way to stop the massive inflow of US dollars was the restrictions to be placed on Participation/ Notes (now better known as P Notes.)

THE PARTICIPATORY NOTES

It was long known that lot of money from unidentified sources was flowing in through financial derivatives One way of reducing capital inflow in the country was to restrict it by making the investments more transparent, which is what Securities and Exchange Board of India (SEBI) thought it fit. Its intervention came in the form of a Consultation Paper as to how it wanted to control capital inflows by restricting /banning the use of Participatory Notes (P-Notes) by foreign institutional investor (Flls). This regulatorinduced correction made the stock market go down 10% in less than10 minutes.The Finance Minister rushed with firefighting equipments to reassure that the Participatory notes are not going to be banned. This was further buttressed by the sebi chairman.

Shri P. Chidambaram reiterated that the Government and the market regulator did not intend to ban Participatory Notes. The steps outlined in the consultation paper, were the culmination of long discussions between SEBI, RBI and the Government, and were aimed at moderating capital inflow into India, which had shot up in recent weeks. He said, “It is important to moderate capital in flows which have been very copious. They have an impact on rupee and also contribute to the steep and sharp rise in the market.” He assured that the regulator would put in place the new norms next week.

THE SOLUTION

To my mind, any solution to the menace of continuing appreciation of Indian Rupee would need to be dealt with two levels- the collective micro-macro level of the exporters through their common platform or their trade bodies or associations and the second one at the national Government level.

First at collective micro-macro level of exporter through their common platform of their trade bodies or associations In the given scenario, when the individual vendors or exporters do not have any professional knowledge on safeguarding the value of their hard – earned US dollars nor do they command means to hire at individual levels of any body who could rightly secure their interest, it would be better that at the trade body or association levels and there are a number of them professing to serve them- there could be advisory cells, comprising specialist in hedging, who could provide information to the exporters-members on how to help them in hedging operations. The Associations generally to do have enough money to meet the expenses of meeting such cells. In the alternative, the association could charge a fee at individual levels. Nobody should mind paying such charges.

This, I do admit, is not the solution to the continuing northward journey of Indian Rupee, but it need to be addressed seriously by the Government including RBI, Who seems to have raised their hand in combating the appreciation of Indian Rupee,even if it is their prime responsibility.

Two, Since the Government is sitting on a pile of US dollars, much beyond the actual requirement for administering foreign exchange regulation, this opportunity could be used by the Government to plan, on immediate basis, import of technology, required for accelerating the development process and promoting futuristic industries, beside of course improving its infrastructure. This needs to be done by the Government, before the pile start melting away and the US dollar picks up the strength vis-a-vis Indian Rupee.

Three, the Government should immediately prepay and retire heavy international debts, contracted on higher interest rates and thereby reduce the burden of foreign loans.

Four, the Government should reduce the interest rates for foreign funds, which would reduce the parking of funds by the foreigners in India. This should in wake a difference in remission of parking of foreign funds in India.

Five, the government could also discourage heavy investment of foreign funds in Indian equities. by declaring some “lock-in” period for Flls for acquiring equities. This would stabilize the fund flow in Indian equities for pure speculation and quick gains.

Six, the Government should seize this opportunity to regulate the inflow of funds by using the PN route. This would be additionally justified on the ground that when the domestic investor wants to invest he is required to provide all details about his funds, but when a foreign investor invests through the Participatory Notes, he is not subjected to the same transparency to invest in India. This denies the Indian investor a level playing ground.

	US Dollar		Euro		Pound
	Now	Year Ago	Now	Year Ago	Now	Year Ago
Indian Rupee	39.68	45.30	56.23	56.83	80.53	84.46
Pakistan Rupee	60.64	60.60	86.01	76.50	123.30	113.60
Bangladesh Taka	68.70	66.63	97.36	83.50	139.62	123.99