Mumbai: Gem and jewellery exporters are suffering as fears of a global credit crunch and the stock market’s near 20% slump this year dry up the flow of cheap dollar loans they used to fund their business.
Having seen margins squeezed by last year’s 12% plus rise in the rupee against the dollar, the jewellers now find themselves forced to take out more expensive rupee loans as foreigners turn sellers of local stocks and withdraw their cash.
“High interest rates have been harming us to a great extent,” said Sanjay Kothari, chairman of Gem & Jewellery Export Promotion Council, said of the $17 billion industry.
Rupee loans carry an interest rate of 10-12% while dollar loans carry a interest of 7%, Kothari said.
The industry, whose main markets are the United States, United Arab Emirates and Hong Kong, accounted for 13% of Indian exports in the first half of the 2007/08 fiscal year that runs until the end of March. Gem and jewellery exports rose 21% in April-September 2007 from a year earlier.
Even the dollar loans that are available are more expensive. The shortage of dollars in the Indian banking system has forced banks to scramble for dollars to meet their funding needs, which helped knock the rupee to a five-month low this week.
“Some bankers are saying they don’t have dollars,” the chief executive officer at a jewellery firm said.
Exporters could get dollar loans at six-month Libor (London Inter Bank Offered Rate) plus 100-200 basis points last year, but now they are being charged 50-100 basis points more as additional fees, officials said.
“This year we are paying much more than last year because last year the dollar was amply available,” the CEO said.
Capital inflows have virtually dried up in the banking system, a key source of dollar funds, as foreigners turn sellers of stocks amid a global market downturn, and after policy makers clamped down on the offshore loan market last year.
“This has a local and a global flavour to it in the sense that exporters have sold all their dollars, and importers are sitting unhedged and the global market turmoil has affected dollar inflows,” said Hemant Mishr, managing director and head of financial market sales, South Asia at Standard Chartered Bank.
So far this year, foreigners have sold more than $3 billion of stocks, a sharp reversal from 2007 when they bought a record $17.4 billion.
The sharp rise in the rupee in 2007 followed by a retreat of about 2% so far this year has also complicated things for jewellers, who have had to become more nimble in hedging their currency exposures.
Jewellers tend to pay upfront for their imports, chiefly gold and unfinished diamonds for processing, but it may be six months before they get export proceeds, more than enough time for a rapidly moving currency to significantly change profit calculations.
“Fifteen days back the rupee was at 39.50 per dollar and today it is at 40.30,” the chief financial officer at another Mumbai-based jeweller said.
“Where is the Reserve Bank of India and what is it doing for the stability of the market, and how can an exporter cover 80 paise in his realisations?,” he complained.