New Delhi: Tirupur, Tamil Nadu-based textile exporter D. Prem recently landed a new client that he wasn’t exactly wooing.
He was even more bemused when the buyer told him why his firm had been sought out. It was all about bargain hunting though Prem wasn’t discounting his goods. The buyer, a well-known European brand, decided to shift focus to India because a sharp appreciation in the Chinese currency made it expensive to buy China-made goods.
Exporters such as Prem, chairman of the Rs100 crore Prem Group, typically compete with China for a share of garments that flood international shop shelves each season. But the recent spike of the Chinese currency, the renminbi, and the depreciation in the Indian rupee this year—both against the US dollar—has helped some Indian firms steal a march over their Chinese competitors.
Since the beginning of 2008, the renminbi has appreciated or gained value by 4.23% against the dollar, while the Indian currency has depreciated or lost its value by 1.32%.
The renminbi trades in a narrow band against the US dollar. The currency is loosely pegged to a basket of currencies, and is driven by a range in which it trades. The US dollar is a dominant part of that basket.
Any appreciation in a currency makes exports costlier for that country, while a depreciation in its value makes its products that much cheaper for consumers abroad. As a result of the currency swings, the Indian exporters have gained a 6% currency advantage over their Chinese counterparts in the last three months. The US has put unrelenting pressure on China to revalue the renminbi, arguing it is still overvalued.
In the current scenario, products with short production cycle such as textiles are expected to gain. It is because the time taken to execute an export order in textile or garment is less, often in weeks, and big American and European retailers are looking for opportunities to exploit changes in currency movements.
But not all sectors of the Indian economy are benefiting.
The appreciation of the Chinese currency poses a threat to firms that import goods from China such as power companies that are planning to import boilers or telecom players which were buying telecom infrastructure equipment. Their import bill will go up if the situation continues.
The Chinese currency was fixed to the US dollar, or a system where renminbi moved in line with the greenback until July 2005. Since the the delinking of the peg, the renminbi has appreciated in excess of 17% against the dollar.
The Indian currency, which gained as much as 12% against the dollar in calendar 2007, was nearly breaching Rs39 to a dollar. But, the stock market volatility, which led to a net outflow of capital, resulted in the rupee losing its value against the dollar.
A net outflow of capital means people are demanding dollars and are selling the rupee, which means less demand for the Indian currency.
“The appreciation (of the renminbi) might tilt the balance towards European vendors,” said Yogesh Kirve, a telecom analyst at Mumbai-based Anand Rathi Securities Ltd. Though “other factors like integration and compatibility with existing equipments also play a role in buying”.
Reliance Communications Ltd, a telecom player belonging to the Reliance Anil Dhirubhai Ambani Group (Adag), is on the verge of placing a major order that is valued in excess of $5 billion and Chinese vendors are vying for it. New telecom players who have been given permission to operate in India are also expected to source equipment from China to keep their costs low, said Kirve.
The annual investment by telecom players in India is estimated to range between $12 billion and $14 billion, and European vendors have more than three-fourths of the market share. The price differential between Chinese and European vendors range between 20% and 30%.
Companies that are planning to set up power plants are also likely to be impacted. Importing from China has traditionally been a norm for firms because the equipment is often cheaper by 30%. Reliance Power Ltd, another Adag company, which is developing 13 power projects with a planned capacity of 28,200MW, is exploring importing Rs10,000 crore worth of equipment from China.
Subir Gokarn, chief economist (Asia-Pacific) for Standard and Poor’s, an international credit rating and investment research agency, compared the current situation to the time when Sars (Severe acute respiratory syndrome) hit China in 2002.
At that time, buyers moved away from China because of logistics issue, he said. “When the situation returned to normalcy, they (buyers) swiftly moved back to China.”
He added the outlook for the rupee is one of appreciation against the dollar because of projected surplus in balance of payments, a statement of the country’s trade and financial transactions.
A surplus in this statement would mean net capital has flown into the country. For now, though, Prem is enjoying his price advantage over his Chinese counterparts and is hoping to win more export orders from Europe and the US.