Rupee is going through a drastic depreciation phase. This is causing serious concern among the domestic industry players as exports have become expensive, increasing the operating and production costs. From `44 for a dollar in August 2011, the value of Indian currency has depreciated to more than `45 by March 2012 and `56 for a dollar on May 30th, 2012. During December 2011, the rupee slide even crossed `54 for a dollar.
India had been battling inflation for almost a year, and had been successful to an extent, but with the current situation, inflation is flaring again. With the rupee value sliding, industries would opt to pass on the extra costs to the consumers. Overall performance of Indian economy is expected to be negative for the next quarter. Recovery is also anticipated to be time consuming, depending on global and macro factors.
With the RBI intervention, some initiatives were taken to restrain speculation. Certain policy measures were also adopted to incentivize dollar inflows into the economy. The liquidity infusion of the European Central Bank also proved positive in recovering rupee value. Prior to the budget declarations, there were positive expectations regarding reform measures, and credible fiscal consolidations. On the contrary, budget proposals by March 2012 only antagonized foreign investors. Furthermore, the net FII equity flows which were around $12 billion during January and February turned negative during April and May.
The present state of dropping rupee value is said to affect cotton prices. With the fall in rupee, cotton imports from India are likely to become costlier, and global players seek renegotiation of contracts that were already signed. Earlier contracts were signed when rupee was trading around `50-52 for a dollar. Also there is a sluggish demand for cotton at the global level due to surplus production.
Not a good phase for some apparel brands:
Rupee depreciation may, though not immediately affect the apparel industry, will face price hikes in the coming months. This is more applicable for brands that have a bigger import composition. There may be an increase in the input costs, which will ultimately be passed on to the consumers. Brands such as Tommy Hilfiger, Blackberrys, and Calvin Klein import more fabrics, and are likely to face tough times.
Will it benefit apparel exports?
It is also argued by industry analysts that a depreciating rupee will increase exports, and export oriented industries. Despite the ongoing Euro zone crisis, creating a low demand from European countries, growing demand from US and other non-traditional markets contribute to an increase in the export figures of India. As per AEPC estimates, exports of apparels from India during 2011-12 was USD 13 billion. This is a 14% increase over the export figures of the previous year which was USD 11.4 billion. With the easing of cotton and cotton yarn prices, exports have improved.
Based on care rating's forex income and expenditure flows, textile industry is identified as a gainer under current forex environment.
Economic analysts believe that rupee sliding may settle down in the coming few months, but the aftermath will have to be faced by the country, which might be painful and challenging.
Rupee settling down at `52-54 for a dollar will be positive for export oriented industries. Global economic uncertainty is the major factor for the rupee depreciation. Followed by this are other reasons such as growing current account deficit, inflation level, and lowering growth levels. Proactive policy measures should be followed to counter externalities, which would ultimately convince investors that Government is taking firm actions for promoting growth.