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."


 

Reacting to the question whether depreciation of Indian Rupee would help India regain its lost position in garment exports, Vaid said, "During 2006-07, India lost some of its market to its Asian competitors like Bangladesh, Vietnam and Cambodia, which not only had better currency regime, but also better domestic policies and input costing. A weaker Rupee will definitely help the Indian garment exporters, especially in the US market, where India slipped even below Bangladesh in May 2008. However, given the double digit inflation, the other determinants of Indias competitiveness like input costs and capital costs will significantly dilute the gains arising from the sliding Rupee."


A. Sakhtivel talks in the similar vein, when he says, "I wish to point out that by and large, the exporters are not in a position to make immediate gain due to depreciation of Rupee against Dollar since exporters have already hedged their foreign receivables in forward contract for six to nine months. I expect there will be some improvement in exports if the present currency level is sustained. Even if we witness the continuation of the depreciation of Rupee against Dollar trend in the forthcoming quarters also, the exporters could not gain much, since the benefit arisen has already been offset by the increase in input costs, processing cost and transaction cost by more than 15% to 20% compared to the beginning of this financial year."


Rahul Mehta feels that "no exporter can afford take a risk in such times. Therefore, it is very likely that he would continue using a conservative estimate whilst costing for his products." He adds "the approximate 12% depreciation of the Rupee is matched by the 4% increase in bank interest rates likely from 1st October 2008 and 3% reduction of duty drawback rates. In addition to this, the overall inflationary trends have taken their toll on the garment industry as well, virtually nullifying the possible gains from the Rupee depreciation."


G.S. Madan is of the view that "the exporters would have to face the current violent situation in the exchange rate market as uncertainty about the future rates continues. Many exporters, who tried to hedge their currency risk by executing forex derivative contracts with banks, suffered huge losses on steep fluctuations in the value of rupee as they were not experienced in finalizing such contracts with the banks. However, the depreciation of the Rupee may benefit some exporters in the short run..." Siddarth Sahni, MD, Urban Apparels confirms that "Rupee has been volatile and it is in no one's interest if it moved up and down, as benefits come only in the long run... since when the payment comes, no one knows what will be rate (of US Dollar) at that point of time."


What Lies Ahead?


As pointed out earlier by The Stitch Times, there has been a marked slowdown in the US market, which was on the edge of depression. This has aggravated with what I call as triple-decker calamity due to violent shake-up in US financial market. If one were to go by the emerging trends, as revealed in the US Department of Commerce site, Indian apparel exports dropped by 3% during January to June, 2008. The decline is estimated to have only further escalated to some 5-6% in the next three months. Almost all the major retailers have also reported decline or less than anticipated growth in the sales. US Prez. Bush minces no words when he reports about "Entire US economy being in danger" to the US Congress. As reported earlier in The Stitch Times, there been slow-down in Europe as well, particularly the U.K.


One can draw some solace, if at all, from what Rajendra J. Hinduja Managing Director, Gokuldas Exports said, in his interaction with The Stitch Times, "However, India is faring better than China and Sri Lanka or such other countries. Other countries have witnessed a more prominent slowdown in their apparel export figures." However, he admits the slow consumer off-take, the volatility of the Rupee having impacted the shipments from India. He says apart from recession, the Rupee being at Rs.39 at one point and now being at Rs.46 is impacting a lot of companies. He says, most of the companies have made forward contracts at the rates of Rs.40 to Rs.41 and consequently Indian exporters are not able to catch the recent upswing in the Dollar. He attributes a 20% rise in cotton prices as weakening the Indian apparel exports.


Referring to the domestic market, he said it is also showing bad market sentiments and the low consumer demand. Big retailers like Shoppers Stop, Pantaloon, Aditya Birla and so on have also slowed down their investment plans. Adding a hopeful happy note he says, much has to be seen with the ensuing festival season which starts with Dussehra and Diwali and hopefully the Indian market would pick up by then.


According to Rahul Mehta, the major consuming markets of the US and the EU continue to be sluggish and there appears to be a little hope of a turn around in the next 12 to 18 months. He points out the brighter side of depreciation of Indian rupee, when he says, All in all, therefore, one can say that if the Rupee had not depreciated, the recent actions of the Government could perhaps have seen the early demise of our industry, but with the current depreciation, perhaps we can live to fight another day.

 

Satvinder Luthra of Cotton Jersey wants the garment exporters to live in realistic world. He said when Rupee appreciated, we lost business because we could not afford to make the product at the cost buyer wanted; now with depreciation, and buyer cannot afford it at the cost we are giving.


What Industry Expects Government/RBI to do?


Our readers would recall that till recently-just a few weeks back -The Stitch Times has been giving full-throated support to SOS appeals issued by the industry against the appreciating Rupee that had wiped out our pricing edge for exports. The relentless onslaught of appreciating rupee saw export orders dwindling and left our exporters biting their nails. Person, no less than Finance Minister P. Chidambaram repeatedly advised the exporters to live with the appreciation of Indian Rupee by leaving them in lurch and abdicating his responsibility to help exporters on matters, in which the exporters had no role to play. However, it is the U-turn now. The depreciation of Indian Rupee had come up at a wrong time, particularly when the garment exporters in general had already made some ill-conceived hedging arrangements, which appeared at one point of time, the only hope of warding off squeeze on their wafer-thin margins.


There is, however, a general expectation on the part of garment exporters that the Government and RBI must intervene. Sakhtivel emphasizes that Government/RBI intervention is necessarily required in the context of total volatility of the forex market. He says it is due to abnormally increasing involvement of FIIs through participatory notes that the RBI is intervening thoroughly both the forward as well as spot markets to prevent the Rupee from slipping steeply against the dollar. Madan is also in favour of RBI intervention. He is of the opinion that our exchange rate policy should be guided by careful monitoring of exchange rate by the RBI. If needs arises, RBI should intervene in the currency market to curb undesirable movements. In fact, RBI has already started selling dollars to prevent further depreciation in the value of Rupee, he said.


What Corrective Actions can meet the Crisis?


Among the suggestions received from the respondents, some like Rajender Hinduja do not see any special reason to put up a strategy to attract buyers, as they know India quite well, and if we supply according to their requirements in terms of quality and timing, they would buy from India.


Sakhtivel, however, wants the value of Rupee against dollar should have dual exchange rate and for exporters the value of Rupee against dollar should be fixed permanently. This, he says, would largely help exporters to fix up their price during negotiation with buyers. In this way, the exporters would be insulated from price fluctuation of Rupee against Dollar. Madan says that the Government should treat textile industry as a priority industry and the representations made by the industry representatives must be acted upon by the Government to help them to compete in international market.


Ray of Hope


There are a few who lit up hopes. Hinduja says, "The positive side is that the Rupee has bounced back to 45 to 46 levels and with the good cotton crop which is expected, I think India will have an opportunity to snatch a sizeable business from our neighbouring countries."


Rakesh Vaid also joins the bandwagon and is quite optimistic about the apparel export scenario in the near future. He says the last few years has seen a healthy public private partnership in various initiatives towards skill and market development and I see a positive approach towards resolution of impending issues like labour, fiscal policies and incentive schemes. However, for this, he says, we have to work upon several areas like product specialization, branding and better value propositions to attract international buyers. At company level, he feels, the strategy should be to have agile, lean supply chains, develop niche areas, focus on identified core competences and draw upon our strengths like good domestic availability of inputs and skilled labour. As Chairman of AEPC, he highlighted the aggressive marketing strategies adopted at the Council level to increase awareness about "Brand India" through increased participation in overseas fairs, especially in emerging markets, where we have large untapped potential. Skill development, he says, is being pursued at the grass root level through various ATDC centres and institutes.


 

My Views


It would be nave to think that Indian economy can remain immune from what is happening in the rest of the world, particularly the US. This has repeatedly been proved by the events and its latest confirmation is reflected in the steep depreciation, almost bordering the free fall of Indian Rupee vis-à-vis US Dollar, which have been triggered by the US phenomena as discussed above - whether it is the recovery of the US Dollar or higher global crude oil prices, aggravating current account deficit and increased Dollar buying by oil companies or slowdown in capital inflows or withdrawal of FII funds from Indian market. This drives me to concede the supremacy of US economy and its currency.


Let me refer you to the very, very happening US economy, which is giving jitters by producing a shock a day. As if the triple-decker whammy of collapse of Lehman Brothers, Merrill Lynch and American International Group was not enough, today's news of collapse of Washington Mutual, which is the fourth largest bank in the US, has only aggravated the crisis that the US economy is already deeply in. It is the biggest ever bank failure in the US history. This fresh dose of crisis would only lacerate the wounds of loss of over 600,000 jobs during this year alongside an estimated 9.4 million people looking currently for employment in the US. I do not think that with the collapse of financial system in the US tagged along with the heavy dose of unemployment can, in any way, let the US economy perk up and help generate demand for textiles and garments. Even much before an array of collapse of various financial institutions and banks, there has been a marked decline in the import of garments in the US. The apparel shipments to US are diving for the first time since the dismantling of the quota regime in 2001. Several of the top American retailers like Saks, JC Penny and Kohl's reporting middling sales more than half way into the calendar year. The total apparel imports into US fell by 4.04% by value to $32.99 billion during the first half this year. The US recorded 8-10 % negative swing in May and June. Sectoral analysts said the figures, especially the May-June data, confirm fears about weakening consumer sentiments in US impacting the demand in a significant way, without ruling out further belt tightening by the domestic vendors leading to more job cuts.


The situation is other major world markets like the European Union and Japan is also not rosy, even if it is not as bad as in the US, but there is an acknowledged global slowdown.


This situation, notwithstanding brave words intended to dispel the fear of worse times to come, reduces the chances of revival of Indian garment exports not only to the US, but also other prosperous markets. This, I trust, should also impact the lesser countries which would deny us even the hope of "exploring and exploiting other potential markets".


With virtually no favourable developments in sight and high volatility of Indian Rupee for the reasons beyond the realm and control of RBI and/or Government of India, who seems to have disowned the responsibility of coming to the rescue of Indian garment exporters, the level of Indian Rupee would continue to be uncertain, which would cast its spell on Indian garment exporters, too, who would continue to be in a dilemma on how to price their products, at international level.


The Way Out


All that has happened on US and Indian fronts, defies all anticipations and there is no certainties for the future; except it would continue to be uncertain. The only way, to my mind, is to fix the value of Indian Rupee vis--vis US Dollar for the exporters, which alone can immunize or insulate them from the volatility of currency fluctuations and lend ground to them to negotiate the prices of their products for exports, on a continuing basis without any threat or fear of losing out on account value fluctuation, which is neither their creation nor within their control. This domain clearly lies with the Government and its functional organs.