By Sujata Dutta Sachdeva , The Times of India

India seems to have grown up and that too in a hurry. This is what some policymakers feel about the strengthening of the rupee against the dollar. Once traded at around 47 or 48, the rupee now hovers around 40 to 41 against a dollar – an appreciation of nearly 10% since late 2006. The fastest rise in three decades, say experts.

POLICY DILEMMA

Indeed, this has posed a dilemma for policymakers – there are strong viewpoints both for and against the rise. Some say it’s not a good thing, while others feel it shows our increasing importance in the global economy. Jamal Mecklai, risk-management consultant, says, “It shows we have grown up. It’s the market that’s pushing it and I trust the market more than the judgement of the Reserve Bank of India or finance minister.”

Observers say the rise of the rupee has been quite dramatic. It had depreciated steadily for a decade after being floated in 1993 – dropping from an average annual rate of Rs 31 to a dollar in 1993-94 to 48.40 to a dollar in 2002-03. However, between 2003-04 and 2005-06, the rupee appreciated by nearly 3% against the dollar. And since September 2006 it has been rising almost steadily. In fact, it’s not only the dollar that the rupee has been appreciating against. It has been holding its own against other currencies as well. Between January and May 2007, the rupee’s value against the pound, euro and yen rose by 8%, 6.9% and 11.2%, respectively.

So, is the rise good or bad for India? What impact will it have on the global competitiveness of Indian firms? Is it time for the RBI or the FM to intervene? These questions are uppermost in everyone’s mind today.

GOOD OR BAD NEWS?

There are two views on the issue. Mecklai argues, “The market is pushing the rupee so we have to let it play itself out. Of course, some companies will gain and some will lose in the process.” He attributes the rise to the inflow of dollars into the system. The market is flush with forex inflows: net investments by FIIs were $10.16 billion during January-June 2007. Similarly, FDI inflows touched $19.53 billion in 2006-07, a 153% increase over last year.

But Rajiv Kumar, director, ICRIER, is not so gung-ho. “The success of most developed countries is correlated to a weak currency. Take Japan in the 1960s, Korea in the ’70s and China in the ’80s. All of them grew on a weak currency. India’s biggest strength is our abundant labour force that helps keep our prices low. To boost our economy we need to push up exports and that can happen if our prices are competitive. These are interlinked. Therefore, the rupee should be weaker than what it is now.”

MULTIPLE EFFECTS

The situation cannot be seen as a clear black or white. As Marut Sengupta, head, policy, CII explains, the rise should be seen at multiple levels. “India’s import bill is far higher than our export earnings. When the rupee rises, the trade deficit comes down. Products that have an import component too become cheaper. Since inflation is high and liquidity is robust, the appreciation sucks in the liquidity from the system. Besides, loss-making oil companies get to see their losses coming down,” Sengupta explains.

But on the flip side, exports are hit and profitability declines. “With an appreciating rupee the cost of production rises, so exports become costlier. In a globalised economy, we stand to lose business to our competitors. Particularly in textiles, IT/ITES etc. Also, if imports are cheaper, domestic players may lose out,” Sengupta sums up.

This creates problems for some companies that earn most of their revenues in dollars – including IT giants such as Wipro and Infosys. It also creates opportunities for Indian firms by making it less expensive for them to acquire overseas assets.

No wonder, Professor Jeremy Siegel of Wharton feels a rising currency can cause distress for India. “This is painful. It’s been the strongest appreciation of the currency in over 30 years, according to my data,” he says.

ARE WE LESS COMPETITIVE?

A survey conducted by Ficci shows some sectors are already bleeding. While chemical and bulk drug manufacturers say they have lost contracts, textile firms have seen exports fall by 25 to 40% in the months of April and May 2007. Steel product manufacturers too have seen exports fall by 60%. The story is the same for many other sectors as well.

So it’s affecting the competitiveness of Indian firms in the global market in a way. However, as Rishi Khosla, CEO and co-founder, Copal Partners puts it. “The volatility of the rupee will not affect competitiveness, it affects margins. Only in case of a revaluation will it affect competitiveness.”

For companies that feel stretched by the rising rupee, Wharton Professor Krishna Ramaswami feels they may not be affected much if their international competitors’ currencies have also appreciated. But they “may lose some share of their sales in the US market and have their margins squeezed if not.”

SHOULD THE RBI INTERVENE?

No, there is no justification to intervene excessively yet, feels J D Agarwal, director, Indian Institute of Finance. Kumar, though, says there’s valid ground for the central bank to intervene and buy out dollars to stabilise the rupee. But Mecklai sums up by saying: “The RBI should be like God. You know He is there, but you want to see Him only when there is a crisis.” In short, the hope is there will be no need for a major intervention. Still, the issue is unlikely to disappear soon.

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