The 16.5% fall in Indian Rupee value over last three months is something, which nobody expected, not even most optimistic garment exporters. There has been noticeable improvement in US economy, which has set the Fed to think in terms of tapering off QE3, in all likelihood from this month. This has triggered in rapid outflow of US dollars from Indian forex kitty, resulting in steepest known fall of Indian Rupee ever. While it would have adverse affect on most of sectors of Indian economy, but those with tilt towards exports would stand to gain. Garment export is, of course, one of those, which has gained from deep depreciation of Indian Rupee. How long will this process of free fall go on, nobody can say, but moot point if when and where Indian Rupee likely to settle. That is a trillion dollar question.
We think that garment exporters are in for favorable period, now and in near foreseeable future when number of factors have joined together to bring smiles on their faces after considerable testing of their patience. The US economy that had triggered global economic slowdown in 2008 and has been fighting it out for a number of years have shown positive signs of recovery. The EU, which was even a more important export destination for Indian garment, is also moving out of recession with France joining group of countries which have come out of recession mode. Now, we also have a God-sent opportunity to encash on depreciation of Indian Rupee, which not only brings in more rupees for every single dollar we earn, but has also rendered our exports cheaper and more competitive than our competing economies, whose currencies have not depreciated much.
While our garment exporting community should continue to bask during appreciation of foreign currencies or the depreciation of Indian Rupee, but then, how long this favorable phase will continue is a very important question. Of the three favorable factors mentioned by me above, it is value of Indian Rupee which is more unpredictable. So, to take a long-term view of Indian garment exports, we must examine in appropriate details why and how long will Indian Rupee take to settle and more importantly at what level?
Free-fall and volatility of Indian Rupee
The unprecedented, virtual free-fall of Indian Rupee with every successive passing day has been truly shocking, day after day for an average Indian; it must be surely depressing everybody in the Government, from Finance Minister to Governor of Reserve Bank of India down to the importers. When we earlier crossed the psychological benchmark of Rs. 60 to a US dollar, we were surprised and this surprise continued to escalate to scale new peaks, day after day. If day before yesterday, the exchange rate of Indian rupee to US dollar saw it rising to Rs. 62; it was actually Rs. 63 next day and today it is Rs. 65 to a US dollar. This is not only limited to our relationship with US dollar, but also with regard to all major currencies, where Indian Rupee has also dipped heavily - to more than Rs.101 to British Pound Sterling. It is same story with all major currencies. And there does not seem to be any end at least to an average Indian who is in a state of bewilderment, confusion and utter lack of confidence in Indian currency.
Over the past 3 months, there have been repeated assertions on the part of Finance Minister that there is nothing to worry on account of fall of Indian Rupee, but the situation has moved from bad to worse; first from month to month and now from day to day. We have been talking big and even boasting of our fundamentals being very strong and about the value of Indian Rupee and of strength of steps being taken to bring the current situation of fast depleting forex reserves on track, but with falling exports, massive and sudden outflow of FII funds, growing current account deficit, worrying fiscal deficit and stumped economy, everything seems to be going haywire.
RBI Governor Subbarao has assured that RBI will continue to take measures to check volatility in foreign exchange market and reiterated that country has adequate foreign exchange reserves to manage depreciation of Indian Rupee. He said that as on August 9, India's foreign exchange reserves were at $278.60 billion as against $ 277.17 billion a week earlier. This is enough to meet around seven month's import requirements. He said RBI did not target a particular value of the Rupee, which is determined by market, but Central bank's concern is to contain the volatility. He assured that these measures will be revisited once the stability returns.
On the question of financing Current Account Deficit, Subbarao said, "They have to come from FDI, FII, equities flow and FII debt flows. The Current Account Deficit has to be financed through stable and to the extent possible through "non-debt creating capital inflows. However, the problem of CAD has to be addressed through structural measures."
Overseas Rupee bets
Though real piece of villain of present state of world economy, of which India is only a part, is bursting of US financial bubble way back in 2008, and attempts of US Fed to bring the US economy back on the rails that saw US Fed to inject what is now popularly known as Quantitative Easing in successive dozes like QE1, QE2 and QE3. It is latest one which has triggered the present crisis by a decision to taper off the purchase of US Government securities worth $80 billion every month which has resulted in fast exodus of foreign funds from India and other emerging economies. However, the Reserve Bank of India is credited with a view that it is the speculative activities in the non deliverable forward (NDF) market that has created panic in Indian financial market. It may be clarified that while the currency futures are traded in stock exchanges, non-deliverable forwards are transactions where multinational banks bet on the Rupee overseas through forward contracts that are settled in dollars. According to RBI, speculation in the NDF markets for the Rupee is now exerting an increased influence in domestic currency markets.
The way out
Structural changes are the most frequent expression that is being exchanged whenever the discussion of volatility of Indian Rupee and Current Account Deficit is taking place these days. What are these structural changes? Essentially, these relate to removal of bottlenecks that are hindering development works; be it eco-clearance for iron mining or producing coal from within Indian coal-fields etc. We seem to be increasingly realizing that absence of decision making in some of the important sectors as mentioned above, carry a huge cost, particularly when we have to import coal and iron ore from the world market, while these are available in plenty in our country. Similarly other infrastructural development is also being thwarted. This has resulted in slowdown in the economic activity in the country, which, in turn, has reduced our exports; thereby augmenting our current account deficit, apart from a fall in our industrial production. We must not only undertake structural reforms on war footing, but also put our infrastructure development on fast track.
A slew of measures announced recently by Government and Reserve Bank of India had aimed at inviting FDI in big way, which appears to be one more solution at the present juncture to shore up our forex, but even before we set out eyes high on an avalanche of FDI inflow, which has alluded us thus far and is likely to be so in the foreseeable future, we must understand as how green are the pastures herein in India. The fact of the matter is that those foreign investors, who have invested heavily in India, are expressing remorse at the present situation in the country. How deep is the malaise at the ground level to retain FDI even if received in India must be gauged. For this, it is important to note what the foreign investors, who have put in a lot of money into their ventures in India after buying Indian success story, feel. That should be right beginning for any sensible and unbiased opinion not only how to attract FDI, but also to retain to whatever has already been invested. Foreign investors are no fools, who can coaxed into investing funds in India without studying as to how those preceding them in investing in India, are feeling and what they have to say on their "foreign ventures" in which they have sunk huge amounts.
Rupee to settle at 70
The major constraint with present dispensation is that they are at fag end of their tenure with General Elections looming large. The time is too short for them to take any bold decisions and even if they take any, results would not be forthcoming in immediate future. But the current trend of Indian Rupee hurtling down at fast pace almost on a daily basis cannot go on for any length of time; it has to stop somewhere, particularly because of its having reached a rock bottom. We feel that it is likely to settle at around Rs. 70 to a US dollar. There have indeed been mixed forecasts and even some of the multinational banks are forecasting the Rupee could fall to 70 for a US dollar.
This article was originally written by Dr. H. K. Sehgal and published in September issue of 'The Stitch Times' Magazine.