Sam Nagarajan, Bloomberg
Mumbai: The rupee’s advance to a nine-year high against the dollar is “madness” and won’t last, said Munish Saigal, director of foreign exchange at Ranbaxy Laboratories Ltd, the nation’s largest drugmaker.
The currency is the second-biggest gainer in the world this month, rising 3.5%, as exporters led by Ranbaxy and Tata Consultancy Services Ltd sold dollars to protect earnings from further appreciation. Finance Minister Palaniappan Chidambaram said 15 April that the rupee is still “very competitive,” fueling speculation policy makers will allow more gains.
“The rupee is massively overvalued and there needs to be some sanity to find out what the appropriate level is,” Saigal said in an interview from Gurgaon, near the capital New Delhi.
A stronger currency may stifle expansion in the drug and software industries that are driving the world’s second-fastest growing major economy. A slowdown in exports, which account for a 10th of India’s $854 billion (Rs35,77,718 crore) gross domestic product, may crimp growth that the government estimates was 9.2% in the year ended 31 March, second only to China.
The rupee closed at 41.97 per dollar yesterday, after reaching as high as 41.65, compared with 43.61 at the end of last month. Saigal said he stopped selling dollars at 42.80, betting the currency will rebound to 43 by year-end.
Rupee appreciation “is a disaster for exporters,” Ganesh K. Gupta, president of the Federation of Indian Exporters Organisations in Mumbai, said 16 April. “I think 44 is a realistic value and we’re asking the government to intervene.”
Shares of Tata Consultancy and Infosys Technologies Ltd, the country’s top two software makers, slumped yesterday, dragging the benchmark Sensex stock index down 0.7%.
‘Disaster for Exporters’
Tata Consultancy this week said profit in the quarter ended 31 March rose 47%, less than analysts expected. The currency’s 1.8% advance that quarter reduced profitability by 0.57 percentage point.
“The way the rupee has been drastically appreciating in the last couple of days is definitely of concern,” said S. Ramadorai, Mumbai-based chief executive officer of Tata. The rupee may retreat to 43.50 in six months with some aid from the central bank, Ramadorai said.
The Reserve bank of India bought a record $11.9 billion in February to slow the currency’s appreciation. The nation added $4.6 billion to its foreign-exchange reserves in the four weeks through 30 March, indicating fewer dollar purchases.
Governor Yaga Venugopal Reddy is battling inflation that accelerated to 6.63% in the week ended 10 January, the fastest pace in more than two years.
“The centerpiece of the agenda for policy makers is inflation,” Tata Consultancy’s Ramadorai said. “In the process, if the rupee appreciates and exports take a beating, they’re probably prepared for it.”
The 5.4% advance in the rupee this year has already hurt exports, with shipments slowing to less than 8 percent for the third consecutive month in February.
A gain of 2 percentage points in the currency erodes operating margins by 50 basis points, said V. Balakrishnan, chief financial officer of Infosys.
Tata Consultancy shares fell 2.4% yesterday, while Infosys dropped 2.2%. The Bombay Stock Exchange’s 10- stock information technology index has declined almost 10% from a peak reached on 19 February.
Central Bank Dilemma
Chidambaram told reporters near Bangalore on 15 April that the rupee’s appreciation is because of “large” capital flows into the country and the rupee is “‘still very competitive relative to other currencies.”
The real-effective exchange rate of the rupee, a gauge used by the central bank to measure its relative value against a basket of its trading partners, rose to a record 113.9, according to data provided by JPMorgan Chase & Co., whose index closely resembles that of the Reserve Bank of India.
The central bank, which vowed to contain inflation within 5% in the “medium term,” faces a dilemma. Intervention adds rupee to the economy, which in turn stokes price increases.
Developing countries are finding strong capital flows a challenge to sustaining financial stability, Deputy Governor Rakesh Mohan told the International Monetary Fund on 14 April.
Saigal, who wants the central bank to stay out of the market, expects the rupee to weaken on its own as importers will step in to purchase dollars.
“People speculating at these levels are going to burn themselves,” he said.
— With reporting by Anoop Agrawal in Mumbai