Rupee Exports Rate
Impact of change in value of Rupee on Exports:
The Theory
The change in value of a currency not only affects the competativeness of exports but also the realisation (returns) of the exporters. Any country witnessing an appreciation in the real exchange rate will see a reduction in demand for its exports. Appreciation of rupee against dollar would dampen the exports as Indian goods & services become costlier in International markets. An appreciation of rupee will also reduce the returns of the exporters. Exporters get their sales proceeds in dollars, which, with the rising rupee, fetch lower number of rupees as every 1 percent change in rupee dollar rate has an impact of 50 bps on exporters. When the rupee appreciates there is an immediate reduction in the value of USD 100, and hence, when measured in rupees, the income from exports shows a sudden sharp movement.
Although in theory shows that change in value of a currency has a great impact on the growth of exports of the country, we need to bear in mind that a country's export performance depends on a whole range of factors — the exchange rate of the domestic currency is only one of these, especially in short term and developing economies.
Empirical Evidence for India:
The below data for last 10 years shows that depreciation/appreciation of the rupee has had not had major impact on the rate of growth of exports in India.
In 1996-97, while the rupee depreciated by 4.7 per cent against the dollar, exports registered a growth of 5.3 per cent in dollar terms. In 1997-98, though the rupee depreciated by 9.1 per cent, the rate of growth of exports came down to 4.6 per cent.
Again, in 1998-99, the rupee depreciated by 6.9 per cent but exports registered a negative growth rate of 5.1 per cent.
While the rupee depreciated by 2.7 per cent and 6.5 per cent in 1999-2000 and 2000-01, exports grew 10.9 per cent and 21.0 per cent respectively.
In 2002-03 and 2003-04, while the rupee appreciated by 2.5 per cent and 9.6 per cent respectively, exports conversely registered high growth rates of 20.3 per cent and 21.1 per cent respectively.
In 2004-05 and 2005-06, the rupee depreciated by only 0.8 per cent and 1.9 per cent respectively, but exports boomed with growth rates of 30.9 per cent and 23.0 per cent.
In 2006-07, the rupee appreciated by 2.3 per cent and exports grew by 22.8 per cent.
The Recent surge in Rupee & its Impact on Export:
Unabated overseas fund flows into domestic equities coupled with prevailing high interest rate regime has strengthened the Indian Rupee by about 11.4% this year.
Despite appreciation of the rupee vs the dollar and its adverse impact on exporter's margins, the country's export is on a growth path. The figures for August indicate a growth of close to 19 per cent in dollar terms and cumulative export growth during April to August 2007 at 18.36 per cent.
Provisional figures compiled by the Directorate-General of Commercial Intelligence and Statistics (DGCI&S) show that exports during August 2007 were $12,686.38 million, which was 18.91 per cent higher than the level of $10,668.78 million during August 2006. In rupee terms, exports amounted to Rs 51,787.31 crore, which was 4.31 per cent higher than the value of exports during August 2006.
The cumulative value of exports during the first five months of the current fiscal amounted to $59,483.99 million (Rs 2,43,611 crore) against $50,255.50 million (Rs 2,30,788.99 crore), registering a growth of 18.36 per cent in dollar terms and 5.56 per cent in rupee terms during the same period last year.
This growth would not be sustainable in the face of an appreciating rupee as the exporters have to compromise on their profits. The fast-rising rupee might hurt the competitiveness of Indian exporters, as currencies of competing countries made slower gains against the dollar, and in some cases even declined. In the past year, the Chinese yuan had gained 3.6 percent and Pakistan rupee rose 0.3 percent, while the Sri Lankan rupee fell 4.6 percent. In comparison, the partially convertible rupee had gained 11.8 percent in the same period and its ascent had hurt export-oriented sectors like textiles, apparels, leather and information technology.
Appreciation of the rupee would lead to loss of comparative advantage for Indian exporters and also has put pressure on margins through cheaper exports. The exporters are unable to get new orders from foreign clients, as the rupee appreciation forced them to increase prices of their products.
Exporters are losing out on their margins, as foreign clients booked their orders when the rupee was ruling at 44/45 to the dollar, and received payment when it had strengthened to around 39/40. Due to the impact of the appreciating rupee, secondary data on different sectors reveals that export realizations have fallen by 12% for chemicals, 6.0 to 6.5% for textiles and exports are likely to dip by 20 - 25% for processed food and agro-products, electronics & electrical items and steel products. To avoid the impact on profits due to volatility in the dollar-rupee movement, rupee invoicing is one of the options being mulled by Indian exporters. The other option in vogue is choosing to hedge the currency risk in dollars by buying structured products (options) in stable currencies such as the Swiss franc.
Sector wise impact
The major export sectors directly impacted by the appreciation are IT & services, textiles, leather ect.
IT & Service Industry
Around two-thirds of the software exports are to the US and close to 70 per cent are dollar contracts, if the trend continues then companies might get affected in the long run. In the short term the volume growth might not be affected as the IT industry, is moving at around 30-32% margins but there definitely there will be some impact on margins on the downside. If it continues for a long time, there might be a dip in the bottom line. Most of the software companies hedge their dollar income in the short term, so they have some comfort level against the falling dollar value.
The BPO service providers will have a greater hit due to rupee appreciation as many of these are working at single digit margins. The BPO sector would suffer a far more severe impact than the large IT companies which get a natural hedge as their work can be done onsite as well. For small, medium companies and BPOs, this does not happen.
Textile & Leather:
Rupee appreciation has been a major issue in the textile industry for past few months now, especially for export sector. Exports have suffered significant losses and many organizations have persistently demanded help from the Government. Yarn exports during the current fiscal is expected to slip by 15-20 per cent of the USD 1.63 billion exported last year, due to the impact of the rising rupee since October 2006.In April this year exports has shown a decline of 15.7 per cent, compared to April 2006.
The rising rupee has impacted leather export earnings during April-July 2007. While export earnings increased by 18.14% to $1036.12 million from $877.04 million, the growth in rupee terms was only 6.02% to Rs 4251.11 crore from Rs 4,009.57 crore during the same period last year.
Handicraft
In 2006-07, exports of Indian handicrafts stood at 3.8 billion dollars. For the April-September period of the current fiscal, exports have been to the tune of 1.3 billion dollars. The handicraft Export has witnessed a 10 per cent slump during the period of April-September 2007.
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