Rupee’s steep fall dents export benefits in the long run: ESC

By : |July 4, 2013 0

NEW DELHI, INDIA: The current steep depreciation of rupee against the US dollar will have an adverse impact on the exporting community in the medium and long run, despite its short-run benefits in terms of higher export realization in rupee terms, Electronics and Computer Software Export Promotion Council (ESC) stated on Wednesday.

“A stable currency is critically important for a sustained pick-up in the international trade. Neither steep appreciation nor depreciation is desirable for a sustained growth in trade. Apart from its distortionary impact on the economy, a volatile currency triggers uncertainties and undue speculation, which in the long run, are not in the interest of a stable trade regime,” says Vinod Sharma, chairman, ESC.

Export, he added, is a dynamic process and theoretical framework that depreciation or devaluation of currencies would help in the export efforts by making the exportable products cheaper in the host country is a misnomer.

“The overseas buyer, most often, will re-negotiate the deals to share the advantages, even if the benefits are notional or marginal. This is true both in the commodity and services trade like software and services exports. Also, a stable currency amplifies the relative strengths of the economy since an unrealistically weak or strong currency can lead to many distortions in the economy.”

On rupee’s steep fall, D.K. Sareen, executive director, ESC, said that there should be a proper mechanism to decide the real exchange rate of the rupee and to take such measures that can counter volatility. “For instance, rupee depreciates, when there is a bunching of dollar payments for imports of oil or redemption of bonds etc. To a large extent, such payments can be foreseen and corrective measures taken well in time, such as RBI pumping more dollars in the market during that time to meet the excess demand to be mopped up later.”

Sharma said that 95 per cent of India’s international trade is dollar denominated. “Dollar fluctuations will have more impact on the value of the Indian rupee. We have to creatively think of widening the basket of currencies that the Indian rupee is linked with. Pound, Euro and Yen, among others, are stable currencies. Therefore, traders should have increasing exposures in such currencies to avoid repercussions of volatility of the rupee vis a vis dollar,” he added.

Speaking for the small exporters, particularly in the ICT sector, he said that they should be oriented for hedging currency risks by the RBI and other organizations.

Steep appreciation of the rupee will spell inflationary pressure in the economy since it would increase the project cost of imported capital goods and raw materials, said Sareen. “Also, many of our exports are import-led. The general perception is that ICT sector exports are less dependent on imports. But most of the platforms on which ICT sector operates, such as digital equipment, satellites, high end computers, telephony are imported, leading to cost escalation of export goods,” he concluded.

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