Mumbai: Bharat Mehta of Milestone India Ltd can’t stop worrying about his fading fortunes and the rising euro since they are so closely entwined.
Mehta, a minority among importers, whose purchases are denominated in euro, says his worries are mounting. The euro has risen some 14% against the rupee in the past six months. Since there is no euro-rupee market, an importer needs to buy US dollars and then convert them into euros.
Exchange rates:About 80% of India’s imports are billed in dollars, while 20% is shared between the euro, Japanese yen, British pound and other currencies. The dollar-euro rate impacts the euro-rupee conversion. Photograph by Tatsunori Misawa/ Bloomberg
Mehta’s problem has been compounded by the greenback’s erratic movement in the recent past. While it has risen against the rupee, it has lost ground to the euro. While the rupee has lost more than 7% against the dollar in the past six months, the dollar has lost about 6.5% against the euro. In effect, importers paying out euros by buying dollars via their banks, will now end up paying close to 14% more than what they did six month ago.
On Friday, the rupee closed at 42.66/67 a dollar in India, a slide of about 7.5% from the start of this year. In New York, the dollar was at 1.5778 per euro—a slide of about 6.5% from its 1 January level. On Monday, the rupee closed at 42.8725 against the dollar.
The rupee’s loss of at least 14% against the euro has raised the cost of imports from countries that use the common currency. For example, in August last year, Mehta, an importer of polyurethane foam used for fitting and fixing window and door frames, paid Rs56.03 for every euro that he needed to meet the cost of imports. In April, he needed Rs62.25 for every euro. Since then, the rupee has lost more in value, and now it costs him nearly Rs66 for a euro.
About 80% of India’s imports are billed in dollars and the rest 20% is shared between the euro, Japanese yen, British pound and other currencies. However, according to Reserve Bank of India data, imports from the European Union rose to $33.5 billion in 2006-07, up from $25.2 billion in 2005-06. The euro, therefore, can hardly be ignored.
According to a forwarding and clearing agent who clears imports from the customs department, around 75% of the shippers in Europe bill in euros. A recent research report from Mecklai Financial and Commercial Services Ltd shows that in August last year, the euro strengthened 10.1% against the dollar. At the same time, the rupee also strengthened 10.6% against the greenback. Hence, there was no impact on the importers. The situation has changed since then with rupee weakening against the dollar, and at the same time, the dollar continuing to fall against the euro.
Foreign exchange expert Jamal Mecklai, chief of Mecklai Financial, says “when we talk about euro-rupee cross currency rates, we have to consider euro-dollar and dollar-rupee rates.” Independent foreign exchange expert A.V. Rajwade says the euro’s growing strength against the rupee does not affect India’s imports much. “Something like 80% of our trade is in dollars. There is no market for euro-rupee. One gets the euro-rupee rate by calculating euro-dollar and dollar-rupee exchange rates. The dollar-euro rate always impacts the euro-rupee conversion,” he adds.
Indian Importers Association, the apex importers’ body of the country, is also not much concerned about the fall of the rupee against the euro. “About 80% of our members are doing business in dollars,” says Atul Kumar, president of the association. According to Kumar, most banks in India have US dollar accounts, and they find it easier to transact in dollars because it is convertible across the globe. However, the demand for the euro is rising after Iran and Syria stopped accepting dollars.
Executives from India’s booming phone services industry, which relies more on European vendors such as Telefon AB LM Ericsson and Nokia Siemens Networks for their network roll-out than equipment suppliers from other parts of the world say there will be a small impact on costs.
“The (appreciating) euro will have a partial impact,” says Ravi Sharma, chief executive officer of Datacom Solutions Pvt. Ltd, the new mobile services company from the Videocon group. However, all equipment is not bought at the same time and billing can be changed from different countries, given that the vendors have factories in different places, he says.
Jai Krishna R. from Delhi contributed to this story.