Mumbai/New Delhi: The nine-year high Indian rupee, which touched Rs41.90 to one US dollar, recording an 8.4% gain in just six months, has now reached levels where it will start hurting exporters, say companies and analysts
India’s software companies, such as Infosys Technologies Ltd, are already feeling the pinch, because as the rupee appreciates, they earn less in rupees for each dollar of revenue they bill overseas clients. India’s top three exports are technology, engineering goods such as cars, and gems and jewellery.
On Monday, the rupee rose 1.4% to Rs41.905 against the dollar, a level it hasn’t seen since June 1998.
“Most of us believe the rupee is overvalued by 10%,” said Venu Srinivasan, chairman and managing director, TVS Motor Co. Ltd, a maker and exporter of two-wheelers. “It’s going to hurt export competitiveness, especially with China holding on to the renminbi.” The second-largest exporter in this segment, TVS sells more than one lakh two-wheelers overseas.
Companies that export typically prefer that their native currencies remain soft or depreciate against the US dollar, the biggest currency of transaction in the world, because a cheaper currency makes it more attractive for the importing nation to buy the goods. China and the US have been locked in a long-standing currency face-off because China’s renminbi trades on a central parity rate, or a narrow band of 0.3%, on either side of the dollar. This rate, the US argues, disadvantages its own producers and makes Chinese imports more viable. Countries such as India and Thailand compete with China, though on a smaller scale, for a share of world exports. The renminbi rate was 7.72 against the US dollar. It has gained 2.4% in six months, and is little changed in a month.
“The rising rupee has, to an extent, impacted export earnings, but this has somewhat been countered by different currencies that are involved,” said a Hyundai Motor India spokesperson. Four out of every 10 cars exported by Hyundai go to Europe and the company is talking to its trading partners to make the euro the trading currency because of the dollar’s dip. The rupee has gained 0.13 % against the euro in six months.
Ashish Thadani, senior vice-president (research) with Gilford Securities, a New York investment firm, noted in a report published recently that a 1% rupee swing could impact operating margins by up to 50 basis points for Indian technology companies. That spells bad news for the services vendors given that, on an average, they earn more than 80% of their revenues in US dollars. And if the dollar weakens further in the year ahead, the companies will earn less in rupee terms.
Infosys, India’s second largest software exporter, said the 1.7% appreciation of the rupee against the dollar, the currency in which it bills the clients, in the three months ending March, had an impact of 300 basis points, or 3%, on its margins. The loss was offset as fewer of its employees sat idle and money it earns from non-core businesses such as investing rose after it shifted cash to fixed deposits from mutual funds, according to Infosys chief financial officer V. Balakrishnan.
India’s technology and back-office service revenues have touched nearly $48 billion in the year to March 2007, estimates industry body National Association of Software and Services Companies. Indian auto makers exported products worth $2.28 billion in 2005-06, the last year for which financial data is available. In the just ended fiscal 2007, auto makers sold a record 1.03 million units, led by Hyundai Motor India Ltd, which exports nearly six out of every 10 passenger vehicles from the country, and Bajaj Auto Ltd, the largest exporter of two- and three-wheelers.
Still, not all automobile companies are complaining.
Bajaj Auto sold 2.98 lakh scooters and motorycles in countries such as Iran, Nigeria and Columbia. The company says exports or earnings won’t dip for now since it had anticipated the rupee rise and hiked the price of its goods and hedged its foreign exchange exposure.
“There will be no adverse impact for the next six months since we have assumed a level of appreciation,” said Sanjiv Bajaj, executive director in charge of finance and exports at Bajaj. About 17% or Rs1,300 crore of Bajaj’s Rs7,667 crore revenues is from exports.
The Indian rupee has gained for three consecutive quarters and has risen nearly 10% from a three year low of Rs47.04 per dollar in July 2006. Foreign institutional investor funds have poured in over $1.8 billion in the first three-and-a-half months of the year, on top of the $8 billion they pumped in 2006, leading to a surge in demand for the rupee. India’s central bank has done little to stem the gains in the rupee because a stronger domestic currency would help the country import goods cheaper as it fights inflation, hovering below 6% after touching a two-year high in February.
“The value of the rupee can only be brought down if the central bank intervenes. If it does not, I would not be surprised if the rupee appreciates to even Rs41 level against a dollar,” says Ganesh Rao, chief executive officer of IBS Forex, a foreign exchange trading platform.
According to a JP Morgan index, the rupee is currently overvalued by 11%, up from nearly 9% a month ago. Put simply, the current value of the rupee is higher than its actual purchasing power or the inflation adjusted value of the rupee. The rupee has been rising against the dollar, but it is not the best-performing currency in the Asian region.
“Everybody was hoping that RBI would step in today and protect the rupee, but today’s appreciation seems to be an indication that the central bank’s only goal is to check inflation,” said A.V. Rajwade, an independent expert on the foreign exchange market.
India’s exports in the first 11 months of financial year 2006-07 were $109.1 billion, while imports in the same period were $165 billion, swelled by oil imports.
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K.Raghu contributed to this story.