Source: The Stitch Times, Oct '08

The meteoric rise of Indian Rupee to almost a free fall within a short span of a few months has had a tremendous impact on textile and garment exporters. From a tearing hurry to scurry for cover through hedging, garment exporters are now seeking immunity from the losses arising out of Indian Rupee at a low level of Rs.46+ to a US dollar, largely due to bad hedging experience. This has taken the garment exporters by utter surprise, bordering shock and unnerved most of them. This situation is proving to be a dilemma for the textile and garment exporters.

The Stitch Times, in view of eminent importance of the appreciation and de preciation of Indian Rupee, undertook a quick survey of the industry and the response has been quick, forthright and candid. Apart from reflecting the views of the important players and/or spokespersons of the industry, The Stitch Times, would like to interpose some clarifications, before offering its overall view, even recommendations even if we are charged with treading where others would shirk. These would, of course, be limited to our concern for the textile and garment exporters.

Disbelief and Shock

First of all, what is the state of mind of the industry players? Did they ever expect volatile upward and downward movement of Indian Rupee. The feeling in the industry varies from disbelief to shock. Says Rahul Mehta, President of CMAI, "The markets are in an extremely volatile situation at the moment with the US dollar going up or down by as much as 50p in a day." Adds A Sakhtivel, President, Tirupur Exporters' Association, "I never anticipated this amount of magnitude of appreciation and de preciation within a short span and in fact, while the banks, financial experts and economists across the board were predicting that the dollar would touch Rs.37 by the end of this year; in a quite diametrically opposite way, the rupee has started depreciating against dollar and now the reports are appearing that the dollar may touch Rs.48 by the end of this year..." G.S. Madan, President, Garment Exporters Association feels that global currency markets have moved in unexpected way during the last one year period. The appreciation in the value of rupee against dollar was very sharp and significant and the depreciation is also very steep and unexpected."

Why Depreciation of Indian Rupee?

But why does it happen? True, the recent depreciation of the rupee against the dollar has been sizeable but orderly, packed within a short time, and caught everybody, including economists both within and outside the country, almost all-guard. There are four key factors that brought this depreciation. These were: recovery of the US dollar; higher global crude oil prices which aggravate the current account deficit and also increase dollar buying by oil companies; slowdown in capital inflows which decreases the supply of dollars and unwinding of positions that were betting on rupee appreciation to check inflation.

The most recent triple-decker whammy of collapse of Lehman Brothers, Merrill Lynch and American International Group has sent now shock waves and multiplied the confusion. This has also impacted the pull out by the Foreign Investment Institutions. Says A. Sakhtivel, "My apprehension on the Foreign Institutional Investors behaviour is rightly proved and now after the collapse of Lehman Brothers, Merrill Lynch and AIG, the FIIs are unwinding their Indian investments both in equities and debt ...to cut their liabilities and outflow of Rs.6,000 crore since the beginning of this month. "The total foreign exchange reserves have dipped by over $ 20 billion since the end of March this year."

Will Depreciation of Indian Rupee Help Indian Garment Exports?

Unfortunately, even the unannounced and unexpected, much-clamoured depreciation of Indian Rupee has failed to bring the cheer, it was expected to generate. Why? According to Rakesh Vaid, Chairman, Apparel Export Promotion Council, "Depreciation is usually good for exports, provided it does not follow a very volatile, random trend ... ... ... At present, the domestic market is witnessing rupee depreciation at a fast pace to touch nearly Rs.47 a dollar in the wake of FII withdrawing $ 368 million in the last 2 days and also on speculation that companies increased purchases of dollar to pay for shipments from abroad and to repay overseas loans. Given the inherent volatility and short-term fluctuations, I do not foresee any major medium or long term benefit of this depreciation. Orders will take cognizance of this factor if the rupee stabilizes at around 42 to 44 range for a certain period."