Readerswould recall that we had dealt with in quite considerable details how depreciationof Indian Rupee to new low on continuing basis for some time has benefited ourexporting community, Realizing that this phenomenon is not going to last forever - not even for a long time - we must take this fact into account, whileprojecting our garment export trajectory. The things have of late been taken upseriously by RBI, with a new Governor taking up the mantle.

IndianRupee has been in turbulence for quite sometime and has shown its extremesensitivity not only to fluctuating moods of FII investors, but also todecisions taken by US Fed on whether, how much and when to taper off QE3. Thisshould make our policy framers aware of the fragility of our forex reserves,requiring us to be on a constant watch on our Current Account Deficit. Of late,there has been high degree of volatility in value of Indian Rupee which hassent shock waves across trade and industry. Nobody gains from such volatility,as admitted by person no less than Commerce Minister himself. Garmentexporters, at their own level, have been agitated on this issue, which has beendiscussed in considerable details in our earlier issues.

Withthis unexpected depreciation of Indian Rupee, almost on daily or even hourlybasis, garment exporters did gain as this brought in more rupees for every USDollar they had earned on their consignments sent earlier. But, they still knewin heart of their hearts that it is not going to last long. They also knew thatdepreciation of Indian Rupee, if it gets stabilized, would attract its own setof problems, including higher cost of imported materials and accessories, apartfrom international buyers who would not fail to ask for their pound of flesh.Luckily, this situation did not last long and Indian Rupee was seen receding indepreciation. The exporters also knew that despite its recent rebound, IndianRupee is still quite undervalued.

Thisis here that Raghuram Rajan, the new Governor of RBI has stepped in. There wasan expectation that he would, unlike his predecessor Subbarao, would yield toGovernment dictat to reduce interest rate, in keeping up with Governmentdecision of preferring development over inflation. But that did not happen.

Themeasures announced by Rajan were well-received by markets with rupee recoveringby 3.5 per cent between September 3 and 6. Markets cheered slew of proposals byRajan, aimed at strengthening rupee and reviving growth, for third straight dayas investors appeared bullish. Against close of 66.01 on one day, the rupee onnext day ended at 65.24 the highest level in nearly 2 weeks - on heavy dollarselling, capital flows and weak American currency overseas. This is strongestclosing that marks over 5 per cent appreciation from record low of68.80 hit onAugust 28. Analysts and heads of treasuries at banks have opined that "theRajan effect''' - the impact of the measures unveiled by new Reserve BankGovernor Raghuram Rajan - will continue to play out in forex market forsometime.


More to come

However, there are indications from analysts that one should now expect RBI to raise repo rate by another 50 bps in fiscal year ending in March to take it to 8.00 percent, followed by a lengthy pause. Some trade bodies like CII are worried that higher rates could prove damaging. Many companies are struggling after the Central bank's rupee measures supported the currency but dried up credit.

Which way will Rupee move?

The question of prime importance to garment exporters is which way will Rupee move and where and when it will stabilize. Now, value of a currency is determined broadly by a number of factors, including growth of exports and imports and the resultant Current Account Deficit (CAD), investment by FIIs, and remittances from abroad, apart from repayment of external debts, among others.

India's merchandise exports grew at rate of 5.9 percent while imports declined marginally by 1 percent in fourth quarter of 2012-13 fiscal years. According to Central bank, trade deficit in 2012-13 remained at an elevated level of US$ 195.7 billion due to decline in net invisible earnings and higher outgo of investment income payments and only a modest rise in net services receipts led to widening of CAD.

In so far as investments by FIIs are concern. Nomura data shows India has received most foreign equity investments among emerging Asian countries it tracks for a second consecutive year, totaling around $36 billion, with prospect of growth and cheap historic valuations cited among the most frequent reasons. Though Government of India has taken number of measures to boost FDI in a number of sectors, particularly in retail sector, their impact, as of today, is hardly visible. It looks like that foreign retailers, who have been viewed as major source of investment, would take their own time to take decision on their investment in country, which, in turn, depends on end of uncertainties, arising out of General Elections in India in 2014.

Way Out?

Both RBI and Ministry of Finance have specified their priorities. They have said they will maintain fiscal deficit under $70 billion. They said they will rationalize subsidies to see that the subsidy bill does not increase and they will help in easing FDI coming in.


Our Views

The measures outlined above are not the complete or even adequate answer to the present situation, which, as per our assessment, is a matter of very serious concern.

The central point is that we need to increase our exports, particularly merchandise exports. We have not fared badly on export of services, which, is well within the comfort zone, thanks to depreciation of Indian Rupee, which not only brings in more rupees for every dollar, but also makes our services cheaper than our competitors. However, the major concern should be our merchandise exports. There has been a marked decline in exports in most of the sectors notwithstanding depreciation of Indian Rupee, which has been acknowledged by authority no less than the Commerce Minister himself. A number of suggestions have been offered by us from time to time including provision of level playing ground being provided to Indian exporters, reduction of volatility of Indian Rupee and export-friendly policies of the Government. Further, we urgently need to step up our production, which has been at the lowest ebb for a number of months, even years, as reflected in the declining IIP. It needs to be clearly understood that the ultimate savior would be increase in merchandise exports and an increase in exports in services sector can only support our export earnings.

But these alone will not suffice. We need not rush where even angels fear to tread. There have, of late, been a number of political decisions taken, which have far more ramifications that we trust cannot be missed out by anybody, particularly the Government. There has been a mad rush for enacting legislation be it the Land Acquisition Act or the over ambitious Food Security Bill that will go a sure way of damaging our long term interests, that the Government has rushed through in order to win a few political brownie points.

Talking about the merchandise exports, Indian textile and garment sector holds a great potential, with some of the massive advantages like easy and abundant availability of all types of raw materials, processing facilities, great entrepreneurship and decades of experience of running these businesses. All that the garment exporters in particular have been wanting are the level playing field vis--vis their competitors like easy and cheaper availability of credit, revision of terms of employment of workers, reduction in transaction cost, introduction of GST and abolition of taxes at various levels, apart from high volatility of Indian Rupee. These demands have been made so often and on so many fora and promised to be taken care of, but nothing ever emerging out of the promises, has created a situation that there is now a trust deficit among garment exporters and the Government that the garment exporters have nearly given it up.


When and at what level will Indian Rupee settle will depend upon the weight age that we assign to the professional approach of a young economist, who is credited with rightly forecasting the impending financial disaster triggered by Lehman Brothers some three years in advance or the highly political and populist policies oft he Government resulting in unjust, unbearable but avoidable expenditure on social sector and the strangulating the growth and promotion of our manufacturing economy.

This article was originally published in October issue of The Stitch Times Magazine.