The16.5% fall in Indian Rupee value over last three months is something, whichnobody expected, not even most optimistic garment exporters. There has been noticeableimprovement in US economy, which has set the Fed to think in terms of taperingoff QE3, in all likelihood from this month. This has triggered in rapid outflowof US dollars from Indian forex kitty, resulting in steepest known fall ofIndian Rupee ever. While it would have adverse affect on most of sectors ofIndian economy, but those with tilt towards exports would stand to gain.Garment export is, of course, one of those, which has gained from deepdepreciation 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.

Wethink that garment exporters are in for favorable period, now and in nearforeseeable future when number of factors have joined together to bring smileson their faces after considerable testing of their patience. The US economythat had triggered global economic slowdown in 2008 and has been fighting itout for a number of years have shown positive signs of recovery. The EU, whichwas even a more important export destination for Indian garment, is also movingout of recession with France joining group of countries which have come out ofrecession mode. Now, we also have a God-sent opportunity to encash ondepreciation of Indian Rupee, which not only brings in more rupees for everysingle dollar we earn, but has also rendered our exports cheaper and morecompetitive than our competing economies, whose currencies have not depreciatedmuch.

Whileour garment exporting community should continue to bask during appreciation offoreign currencies or the depreciation of Indian Rupee, but then, how long thisfavorable phase will continue is a very important question. Of the threefavorable factors mentioned by me above, it is value of Indian Rupee which ismore unpredictable. So, to take a long-term view of Indian garment exports, wemust examine in appropriate details why and how long will Indian Rupee take tosettle and more importantly at what level?

Free-falland volatility of Indian Rupee

Theunprecedented, virtual free-fall of Indian Rupee with every successive passingday has been truly shocking, day after day for an average Indian; it must besurely depressing everybody in the Government, from Finance Minister toGovernor of Reserve Bank of India down to the importers. When we earliercrossed the psychological benchmark of Rs. 60 to a US dollar, we were surprisedand this surprise continued to escalate to scale new peaks, day after day. If daybefore yesterday, the exchange rate of Indian rupee to US dollar saw it risingto Rs. 62; it was actually Rs. 63 next day and today it is Rs. 65 to a USdollar. This is not only limited to our relationship with US dollar, but alsowith 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 allmajor currencies. And there does not seem to be any end at least to an averageIndian who is in a state of bewilderment, confusion and utter lack ofconfidence in Indian currency.

Over the past 3 months,there have been repeated assertions on the part of Finance Minister that thereis nothing to worry on account of fall of Indian Rupee, but the situation hasmoved from bad to worse; first from month to month and now from day to day. Wehave been talking big and even boasting of our fundamentals being very strongand about the value of Indian Rupee and of strength of steps being taken tobring the current situation of fast depleting forex reserves on track, but withfalling exports, massive and sudden outflow of FII funds, growing current accountdeficit, worrying fiscal deficit and stumped economy, everything seems to begoing haywire.

RBI's role

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.

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This article was originally written by Dr. H. K. Sehgal and published in September issue of 'The Stitch Times' Magazine.