The other external factor which has been into discussions is the slowdown of US economy and its impact on Indian IT industry. There seems to be general consensus between the Indian IT players that such slowdown if not drastic, may actually be beneficial to IT firms in medium to long term. In a slowdown tendency of the client is first to cut down the discretionary IT spending and secondly to reduce the cost of core IT spending. This is where Indian IT services players will score over their onshore global peers as they have ability to cut cost for their clients better than their peers.
Most large Indian IT players have been moving up the value chain and have become integral to the business of the client. To reduce dependence on the US, large players have been diversifying geographically and now have substantial business from European and Asia pacific markets. This gives these companies an added advantage over companies solely dependent on US markets. The impact of US slowdown may be more eminent for small and medium sized IT companies who tend to have large dependence on discretionary IT spending of the clients.
However the for last quarter results upto April 2008 shows that net profit margins are down confirming the indication of impact of US slowdown on Indian IT sector.
THE LETHER INDUSTRY
The similar is the case with this industry too. Kanpur and the adjoining areas is the hub of Indian leather products and US exports account for nearly half of the regions leather trade revenue. The appreciation of rupee against greenback has led to the erosion of profit margin of industry from US shipments. Most of the companies have stopped taking fresh orders and decreased the number of employees as well as number of shifts of the remaining employees. Buried under financial debts many units have already shut their business, with no assignments coming their way, the remaining functional units are also almost out of business. |
|
|
The large agriculture and industrial base have been adversely affected by rupee appreciation. If this rise in rupee continued to be on roll India will lose its competiveness to countries like Bangladesh and china.
THE SUGAR INDUSTRY
Out of the top sugar exporting countries in the world India is competing with china & Thailand in the region and their currencies are not appreciating as the Indian rupee thereby giving edge to those countries. The international sugar organization (ISO) has estimated a higher global sugar surplus of 7.2 million tones for the year 2006-07. The ISO in November, in 2006 pegged the surplus at around 5.8 million tones. In its quarterly report released February 2007, the ISO said that global sugar output is estimated at 160.2 million tones against consumption demand of 153 million tones. |
|
|
PHARMACEUTICALS INDUSTRY
Indian companies on the account of rupee appreciation close to 10% may lose their competitiveness to the competing countries like china and Eastern Europe. Rupee appreciation will impact the profit margins and loose their competitiveness on pricing. China in the region of with the mere appreciation of 1.82% will give tough competition as low cost drug producer. Erosion of prices of generics, non tariff barriers and appreciation of rupee are seen has hurdles to Indian pharmaceuticals exports. |
|
|
Changing Scenario-2008
The current year 2008 has started with sudden tide of depreciation of rupee. The rupee has lost its glory of invincibility that surrounded it over past one year. Between January and second week of February rupee depreciated against greenback by atleast 3%.
The Demand And Supply Theory
The basic puzzle that is revolving in our minds would what causes this rupee depreciation? The answer to this question lies in the simple demand and supply theory in economics. Swings in the rupee is much like swings in prices of rice or wheat are caused by changing equations between demand and supply of currency. The upsurge in demand for US dollars, for instance impel people to sell more rupees to receive dollars: this leads to a cheaper rupee. |
|
|
The recent spell of depreciation of rupee is the outcome of surging demand for greenback from oil importers. Oil prices have globally hit anew record of $135 per barrel on 22may 2008. Since oil is prices in dollar in global market and most of our crude oil requirements being met from imports from overseas, rising prices of crude oil meant that domestic oil companies will need more dollars to fund their purchases. This triggers rupee sales and dollar purchases thus leading to weakening of rupee
Impact of this depreciation
The depreciation of rupee will turn a boon for all the exporters of goods and services like IT as they will able to recover their losses. However from a broader perspective the economic cost of depreciation of rupee in this scenario of global economic environment will outweigh the overall benefits. Six months ago observers were bullish and expected it to strengthen to Rs 36-37 against dollar. Following the fall over last few months, expectations are that it will continue to be weak. Where Dollar has strengthened in recent months against many currencies, rupee on the other hand has fallen much more sharply than the others.
Currency movements in recent years have been influenced by largely three basic factors:
- Current account deficit
- Investment inflows
Central bank intervention
Add to this role of a few factors such as inflation, movement of major currencies and currency speculation to get a full picture. Undoubtedly, the single most factors behind the weakening of rupee is the steep rise in global oil price, which has thrown India’s trade balance out of gear. Oil price has already touch $135 barrel and is expected to touch $150 a barrel in near future. India’s crude import oil bill is expected to cross $ 100 billion in 2008-09. |
|
|
At the same time non –oil imports remain resilient on steady domestic demand. The surging oil import bill, continued strength in domestic demand and expectation of moderating export growth suggest that trade deficit may worsen to 10% of GDP this fiscal with current, with current account deficit shooting past 2% of GDP. Mounting imports of pricey oil and other commodities has led to heavy buying of the US currency by oil companies, non-oil importers and also by banks for non-deliverable forward (NDF) market arbitrage.
NDF is a derivative market, where foreign investors take a position on rupee dollar exchange rate in the overseas market. These markets mostly operate in Singapore and Hong -Kong and banks or companies with active subsidiaries or branches in these countries play in the market. Banks in India are buying dollars cheaper by 3-4 paisa in the one- or two-month forward to sell it at a higher spread in the overseas market and earn profit.
Road Ahead
The recent depreciation of rupee has caught almost all off-guard. Apart from rise in oil prices, which has been the major factor behind rupee weakening, there are some other factors also which have made contribution towards this sudden tide:
- Recovery of US dollar
- Slowdown in capital inflows , which decreases the supply of dollar
- Unwinding of positions that were betting on rupee appreciation to check inflation.
There is large demand for dollars in the market because of the international slowdown in capital markets; the inflow of FII money is slow hence creating a demand and supply mismatch. Therefore I cannot seek a quick reversion of rupee in near term.
Things which were pushing rupee in 2007-08 were heavy influx of foreign capital, these flows as unlikely to be as large as in recent years. A dynamical analysis of balance of payments is important for figuring out where rupee is headed. Surging crude oil import bill, continued strength in domestic demand and expectations of moderating export growth suggest that current account deficit will worsen this fiscal year probably to slightly more than 2% of GDP.The overall balance of payments surplus will probably narrow to a mere $24 billion (1.8 per cent of GDP) in 2008-09 after the peak of around $90 billion (7.6 per cent of GDP) estimated for last year.
The reserve bank in recent months has been selling dollar to prop up the rupee. However, does not seem to be particularly worried about recent depreciation of local currency, despite of continuation of rising of wholesale and consumer price index related inflation. Many experts believe that the government and RBI are unlikely to step in strongly against the rupee weakness and might instead focus more on reviving exports and supporting the economy. They expect the rupee to remain at the current levels in the near future, if not depreciate any further.
All these factors point towards that rupee might slide in near future. Exporters may further delay converting their export earnings, thus increasing mismatch between demand and supply of dollar, and strengthening the case of further rupee weakness. As we know RBI‘s preference is for controlling volatility rather than exchange rate , rupee can further weaken to 43.5-44 against the dollar unless either global crude oil prices rise or there is strong improvement in the in the global risk appetite that increases capital flows into India.
According to the Goldman Sachs forecasts Indian rupee will drop down by 3.2% in next six months because rising oil cost will increase the import bill and double the nation’s current account deficit.
On the other side there are four factors which can moderate the rupee weakness. These are global dollar, growth optimism, capital inflows and reserve bank.
- The dollars global weakness is apparent whichever continent you look at. Euro, yen Canadian and Australian dollar, Brazilian real and Egyptian pound continues to strengthen. Only the Korean won and Indian rupee may be the exceptions.
- Secondly continuous optimism about India’s GDP growth from domestic and international investors.
- Thirdly as the global credit crunch gradually recedes, capital inflows into India in the form of FII & FDI will gradually improve.
- Lastly if RBI ease or remove restrictions from ECB’s, there many Indian corporate who will seek cheap overseas funds. Though due to the tight global credit market ECB’s inflow won’t be as robust as in 2006.
The rupee gained by almost 20% in the last 2 years but lost 8% in the past six months. Hence medium to longer term outlook for rupee is further strengthening.
It is not right if we use words like fundamentals for currency. Unlike real assets , which produce real returns and hence can convincingly produce real discounted value of future streams of returns , there is no fundamental objective value for currency. There is real effective exchange rate based on purchasing parity. But reversion to those levels happens only over a medium or longer term.
Therefore summing up it can be concluded that rupee may regain its upward momentum in medium to long term period. But from this scenario there is a lesson to be learnt that even currencies that are expected to appreciate sometimes go off-course. Therefore get used to flexible exchange rates and manage risk in a better manner.
Back
