Interviews
Don't indulge in fancy derivatives – Financial Consultant
18 Nov '09
3 min read
One of the highlights of the two day 'Texcellence 09' textile conference held in Ahmedabad was a presentation made by Mr SK Modi, a reputed financial consultant and also Director of Sukumo Consultancy Pvt Ltd on “Managing Volatility in Commodities and Currencies in the Textile and Clothing sector”.
Mr Modi began his presentation by outlining the three types of volatilities; demand and supply volatility; commodities volatility and currency volatility, which he said are all now interlinked. On the issue of demand and supply volatility he further bifurcated them into global, national, regional and firm specific.
On the matter of commodity volatility, he said the main issues facing the textile sector are related to cotton, oil, which in turn is related to energy, freight and raw materials derived from oil and the indirect impact on textiles. According to him when prices decline below cost, there occurs an inventory stockpile.
Giving examples of the volatility of the Indian currency versus the US dollar he said in November 2006 the dollar plunged to below Rs 45 and then remained low for 21 months, the lowest being Rs 39 and then in September 2008, it once again started rising and touched nearly Rs 49 and has now once again started its downward climb.
He said that the US dollar is a world currency and there is no such thing as a Euro-Rupee rate and it is only a derivative of Dollar-Rupee and Dollar-Euro. He added by saying that “Speculation is indeed a zero-sum game and if you win, somebody has to loose and vice-a-versa and you cannot outsmart those big boys who manage the global trade in currencies”.
He advised exporters to watch the markets more carefully and anticipate demand and supply correctly and stop dreaming of China exiting textiles, since it will not and try to join large global supply chains which are willing to measure and underwrite risk, i.e. deals in rupees. Going further he said it is okay to deal occasionally in forward vanilla covers, if they improve profitability but should be indulged in, only after considering transaction costs.
He counselled the policy makers to give direct subsidies, like US/EU do, instead of tinkering with the Rupee when they wished to check prices of specific products. In manufactured exports, there is no product where India doesn't have to compete with China and suggested that they could peg the Rupee to Chinese Renminbi.
He concluded his presentation by putting forth an idiom. “If nothing works and you do burn your hands, remember, no matter how bad your position, two and two still make four.”
Mr Modi began his presentation by outlining the three types of volatilities; demand and supply volatility; commodities volatility and currency volatility, which he said are all now interlinked. On the issue of demand and supply volatility he further bifurcated them into global, national, regional and firm specific.
On the matter of commodity volatility, he said the main issues facing the textile sector are related to cotton, oil, which in turn is related to energy, freight and raw materials derived from oil and the indirect impact on textiles. According to him when prices decline below cost, there occurs an inventory stockpile.
Giving examples of the volatility of the Indian currency versus the US dollar he said in November 2006 the dollar plunged to below Rs 45 and then remained low for 21 months, the lowest being Rs 39 and then in September 2008, it once again started rising and touched nearly Rs 49 and has now once again started its downward climb.
He said that the US dollar is a world currency and there is no such thing as a Euro-Rupee rate and it is only a derivative of Dollar-Rupee and Dollar-Euro. He added by saying that “Speculation is indeed a zero-sum game and if you win, somebody has to loose and vice-a-versa and you cannot outsmart those big boys who manage the global trade in currencies”.
He advised exporters to watch the markets more carefully and anticipate demand and supply correctly and stop dreaming of China exiting textiles, since it will not and try to join large global supply chains which are willing to measure and underwrite risk, i.e. deals in rupees. Going further he said it is okay to deal occasionally in forward vanilla covers, if they improve profitability but should be indulged in, only after considering transaction costs.
He counselled the policy makers to give direct subsidies, like US/EU do, instead of tinkering with the Rupee when they wished to check prices of specific products. In manufactured exports, there is no product where India doesn't have to compete with China and suggested that they could peg the Rupee to Chinese Renminbi.
He concluded his presentation by putting forth an idiom. “If nothing works and you do burn your hands, remember, no matter how bad your position, two and two still make four.”
Fibre2fashion News Desk - India
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