Appreciation of Rupee - A Boon or Bane*

Millon dollar question- one of the most popular saying, might change in
future to million rupees question if this present era of rupee
appreciation continued to be on roll.

Indian economy is among the fastest growing economies of the world. The appreciation of rupee
against dollar will prove out to be another huge addition to its economic prosperity and growth story.
However the economic epidemics like poverty, unemployment etc cannot be dealt in short run.
From 2003-08 Indian market is booming in leaps and bounds, today after china India is 2nd fastest
growing economy of the world with registering a growth rate of 9%. India is a trillion dollar economy
and has become world’s 12th largest economy (2008 estimate). Now major question drifting in every
Indian mind is “Rupee Appreciation”. The rupee appreciated by 9.8% against the US dollar during
the previous financial year between April 3, 2007 to January 16 2008.

The rupee appreciation against US dollar over the past 12 months on year to year basis (December
2006 – December 2007) was a higher 13.2 %. The appreciation of rupee against other major
currencies was much less than against the US dollar.

India witnessed 2nd highest appreciation in its currency of 8.35% between January and June
2007 after 9.28 % of Brazil among the emerging economies that are in direct competition with
Indian exporters and find themselves better off due to sharp rise in rupee value, revealed by
ASSOCHAM eco pulse study.

What Lies Behind This Appreciation

The major reason which draws attention towards this rupee

appreciation has been a flood of foreign-exchange inflows, especially
US dollars. The surge of capital inflows into India has taken variety of
forms ranging from foreign direct investment (FDI) to remittances sent
back home by Indian expatriates. The main impact of these flows is as
follows:

1. FDI: India’s starring economic growth has created a large domestic market that offers
promising opportunities for foreign companies. Moreover many companies rising
competitiveness in many sectors has made it an attractive export base.

2. ECB (external commercial borrowings): Indian companies have borrowed enormous

amounts of money overseas to finance investments and acquisitions at home and abroad. This
borrowed money has returned to India, boosting capital inflows. In 2007-08 (april-september)
external assistance (net) was placed at US $ 729 million as against US $ 386 million for the
corresponding period in 2006-07 indicating a growth of 88.9%.
3. Foreign portfolio inflows (FII’s): India’s booming stock market embodies the confidence of
the investors in the country’s corporate sector. Foreign portfolio inflows have played a key role
in fuming this boom. Looking at the period of 2003-04 and 2006-07, the net annual inflow of
funds by foreign institutional investors averaged US $ 8.1bn.

Trends during first five months of 2007 indicate that this flood is continuing with net FII
inflows amounting to US $4.6 bn. Another major source of portfolio capital inflows has been
overseas equity issues of Indian companies via global depository receipts (GDR’s) &
American depository receipts (ADR’s).

Moreover FII’s registered in India has doubled to 1050 between March 2001 –march 2007 and
now around 3,336 FII subaccounts also exist. FII equity flow has increased from $9.8 billion in
2004, $ 11 billion in 2005 to over 16 billion in 2007. The stock market has buoyed by strong
corporate performance and these inflows have risen to 43% in 2007.

However in mid-October RBI banned foreign investment via off shore derivatives called
participatory notes (PN). These derivatives were used by foreign investors not registered in
India (say hedge funds) to indirectly invest through registered investors. Between Mar 2004 –
Aug 2007 the number of FII sub accounts that issued PNs rose from 14 to 34.

Many believed that motive behind such RBI measure was to improve transparency of capital
inflows and that restricting inflows via PN would have little or no impact on overall inflows
coming into the country.
Impact on Importers - The Gainers*
According to an industry analyst: every 10 paisa appreciation in rupee negates one
dollar upward movement in international price.

Rupee appreciation brings jovial time for importers. Major

imports to India are petroleum products, capital goods, chemical,
dyes, plastics, pharmaceuticals, iron and steel, uncut precious stone,
fertilizers pulp, paper etc. during the periods when dollar was getting
strong against rupee, when 1$ = Rs 48 importers used to pay Rs
4800 for every $100.

Since the beginning of the year 2007, rupee has appreciated nearly to
about 10%. With value of rupee Rs 39.35 = 1$ for every $100
importer has to pay Rs 3935 by gaining a profit of Rs 865.

This gain will bring about savings in cost which can be passed on to
consumers, thereby becoming immediate tool for controlling
inflation.

Over 10% appreciations in domestic currencies against dollar has thrown a new M&A opportunity for
India Inc which wants to reach out world by acquiring going concern on a global scale. An
ASSOCHAM study of 70 deals done in the first six months of the last financial year( 2007-08) , in
which Indian firms undertook buyouts worth $ 14 billion , has revealed that Indian companies would
have saved Rs 6500 crore just because of increase in rupee value.
Due to continuous decrease in dollar value, the US had remained the most favorite hunting ground for
Indian companies. $2.9 bn valuation deals were announced with US companies in financial year 2007-
08.
In terms of sector analysis steel rule the rest owing to the Tata-Corus deal. The overall valuation of
M&A in steel sector was of around $5.4 bn.

Rupee appreciation is also welcomed by companies which have overseas borrowings. Significant
levels of foreign currency –denominated, especially US denominated loans generate forex gains
because of reduce interest payments which are occasioned by rising Indian rupee. Companies like
Ranbaxy and L&T have been able to generate forex gains because they have substantial exposure to
ECB’s.
*www.sapphireconsultinggroup.in

Impact on Exporters -The Sufferers*

With the ratio of 70:30 of imports and exports the major export destinations of India are USA, EU,
Japan, Brazil and other Asian countries. Products which generate revenues from these destinations
mainly compose of handicrafts, gems, jewellery, textiles, and ready made garments, chemicals and
other related products. As seen for imports, if we analyze if an exporter is getting Rs 3935 now instead
of Rs 4800 he is at a loss of Rs 865. This loss will lead to erosion of exporter’s profit margin and will
affect their competiveness in global market.

In contradictions to the apprehensions of that there would be

shrink in profit margins of exporters due to emergence of
strong rupee, the latest studies of ASSOCHAM exhibit that
stronger rupee will bring in rich dividends for India Inc and
boost its profit margins between 12-15% in long run as
exporters are brininging new technologies with cheaper
imports for expanding their existing capacities.

The sectors that are likely to gain from rupee becoming

stronger are presented in the following table.

The chamber holds that a strong rupee would reduce the cost of imports and would have some positive
impact on those exporters which have large import content as witnessed from figures above. It further
recommended that if companies are able to expand their capacities in rupee appreciating scenario, they
would in the long run , definitely be in win-win situation as demand for Indian exports in developed
countries would not slow down. The India Inc would be able to export at very competitive prices as a
result of capacity building through technological advancements and increase in margins by 12-15%.

*www.sapphireconsultinggroup.in

Textile And Apparel Industry *

Unfavorable impact of rupee appreciation can be highly

witnessed in Indian textile industry – which had a strong
competitive position in textile exports to US. In the
financial year 2007-08, exports fail to reach the set target
of $ 25 bn. The industry witnessed decline in the
domestic textile exports in the first half of year 2007.
Although we can witness overall increase in imports by
U.S by 5.70%, exports by Indian textile and apparel saw
a decline by 0.21 %.

If we talk the scenario of investment in the textile sector, until recently our textile and clothing
industry was not attracting much investment even from Indian companies. The reason was the
perception that this industry had limited growth prospects.

The opinion has now changed and domestic investments are pouring in. however FDI continues to be
slow because improvement in the investment climate has not percolated to overseas investment. The
image of the industry as potential destination for overseas investment in labor intensive manufacturing
industry is still not very positive.
Impact of this stronger rupee can also felt on employment in textile industries for instance, almost
45000 jobs have been lost in Tirupur most of which are either badli or contract workers. According to
CITI report on impact of textile export deceleration on employment around 2.72 lakh direct jobs and
nearly 3.2 lakhs indirect jobs are lost in the fiscal year 2007-08.
The domestic textile machinery has felt the pinch of rupee appreciation as they are underdeveloped
and are preserves of SME’s. In the last financial year growth of most of the machinery companies is
negative.

Machinery manufactures are feeling heat of rupee appreciation, but the end users are not as much
affected as they are importing machinery from china, Japan and European countries. Currency
flucations in these countries is minimal as compared to dollar.

However in the current fiscal year of 2008-09 some brighter prospects can be seen for textile exports.
The reason behind this positive change can address to factors like china’s strong currency appreciation
and drop in the cotton production. These factors can help industry to fill the wounds of its worst
period.
As in January the annual appreciation of rupee was over 11 % while, Chinese currency appreciated by
6.96%. But when the rupees average appreciation dropped to 8.36% in March, Yuan rose to 8.52.
Apart from this china is facing increasing problems of labor cost and raw material prices.
Therefore all these factors can turn out to have positive impact on Indian textile industry.

*www.sapphireconsultinggroup.in
Inflation
Inflation means a general price rise causing money to lose value. It occurs because the purchasing
power available for spending expands at a faster rate than the available supply of goods and services.

IMPACT OF INFLATION ON TEXTILE INDUSTRY *

Inflation is felt everywhere, retail was among the first sectors to be hit. The Indian
potential has not been met, and inflation is only partly to be blamed. Retailers are
discovering more about the Indian customer, and are going back to the drawing
board to sketch new plans.

-Chillibreeze Business Research Team

After the rising Rupee hit the Indian textile industry, it is now inflation and the rising input costs that
are haunting the industry that is facing stiff competition from conutries like China, Vietnam,
Combodia and Sri Lanka.

“The biggest challenge for the industry is cost. While the soaring oil prices is a global phenomenon,
prices of all inputs including coal are shooting up. This has put a lot of pressure on the industry," said
Nitin Mandhana, vice chairman and managing director, Indus Fila at a press conference in Bangalore
on .

Coal prices in India have doubled in the last one year. Labour is also getting very expensive. Hence
we are losing out on cost advantage. To retain the edge in the global market, we have to create a value
for ourselves in terms of manufacturing efficiency and development," he said.

With situations improving on the rupee front, it is sunrise period for the industry all over again, he
said. India has good design capabilities and managerial efficiency in textiles.

In terms of cotton production, India has already overtaken the US, and is on a par with China, noted
Atul Ujagar, Country Director, Nike India, Sri Lanka and Pakistan. India's total textile exports amount
to about $30 billion per year.

Of this, readymade garments constitute only $8-9 billion. "This is very less in comparison with China
which exports $350-500 billion worth of apparel," he observed. India should give a thrust to the textile
industry by ensuring quality infrastructure and technology, he said.
*www.business-standard.com/india

BS Reporter / Chennai/ Bangalore June 3, 2008, 4:14 IST

Department of Economic Affairs, Ministry of Finance issued WPI-based inflation for week ended
14th February. The WPI-based inflation dropped by more than for week ended 14th February. The
annual rate of inflation, calculated on point to point basis, stood at 3.36 percent for the week ended
14/02/2009 (over 16/02/2008) as compared to 3.92 percent for the previous week (ended 07/02/2009).

The Inflation was 5.66 percent during the corresponding week (ended 16/02/2008) of the previous
year. The official Wholesale Price Index for ‘All Commodities’ (Base: 1993-94 = 100) for the week
ended 14th February, 2009 declined by 0.1 percent to 227.8 (Provisional) from 228.0 for the previous
week.

The index for this major group rose marginally to 248.1 from 248.0 (Provisional) for the previous
week.

The index for ‘Non-Food Articles’ group declined by 0.1 percent to 228.4 from 228.6 (Provisional) for
the previous week due to lower prices of raw silk (4%), raw cotton and raw rubber (2% each) and
copra and rape & mustard seed (1% each). However, the prices of niger seed (12%), linseed (10%)
and cotton seed (2%) moved up.

The index for ‘Textiles’ group rose by 1.2 percent to 140.7 from 139.0 for the previous week due
to higher prices of

1. Cotton yarn-cones (6 %),

2. Texturised yarn (2%) and
3. Synthetic yarn and polyester staple fiber (1% each)

However, the prices of hessian & sacking bags and other cotton yarn (1% each) declined.

The index for ‘Chemicals & Chemical Products’ group declined by 1.4 percent to 214.7 (Provisional)
from 217.7 for the previous week.

The index for ‘Machinery & Machine Tools’ group declined by 0.1 percent to 172.2 from 172.4 for
the previous week due to lower prices of furnaces (5%) and air & gas compressors (3%).

For the week ended 20/12/2008, the final wholesale price index for ‘All Commodities’ (Base: 1993-
94=100) stood at 229.2 as compared to 230.2 and annual rate of inflation based on final index,
calculated on point to point basis, stood at 5.91 percent as compared to 6.38 percent reported earlier
vide press note dated 01/01/2009.

*Department of Economic Affairs, Ministry of Finance

*texprocil.com