TECHNICAL ANALYSIS of RUPEE APPRECIATION

From March 2007, rupee appreciation becomes an apprehension for us. It’s like thunder storm for exporters of our country especially (SMEs). Rupee appreciated by 13%, in the value of the rupee over the US dollar since March 2007 and 7% against a basket of currencies including the yen and renminbi is an increase that does not reflect economic fundamentals and is seriously hurting Indian industry’s competitiveness, margins and exports. Initially it was taken as boon by the Indian business community but due to various reasons it becomes a curse for Indian export community.

According to various economists and experts, there are some factors which are boosting this issue like excess capital inflow, federal interest rate cut, poor government policies, political intervention etc.

Capital Inflow: if look at the statistics, Capital inflows have reached close to $16 b during Jan-Nov 2007 and around $8.2 b came in between the Fed rate cut in September and when the Indian govt. imposed curbs on foreign investors in mid-October. If we analyze the situation thoroughly, capital inflow in country is very good but due to its utilization or output is very subdued, it’s is creating a gap and supporting rupee appreciation. Few examples are given below:

• Indian railway plans to raise Rs 728 bn and partially from ECB (External commercial borrowing).
• Real estate and infrastructure sector accounted around $2.2 bn of investment and its climbing on top of top of PE funds.
• IT & ITES sector is all time hit for foreign investors.

Capital inflow is good for development of country but its returns are very slow because of non productivity and inefficiency of system which affects exchange rates and results a setback for Indian business community.

Federal rate cuts: Last year (2007), when US Federal Reserve decided to cut the interest rates, around $ 8.7 Bn portfolio investment flowed into Indian stock market.

Government Tussle: India is very lucrative market for investors and they are investing in it very well, at the same time our government become greedier and trying to pool so much of capital investment without any proper use of last investments.

Biggest Losers:

As per the estimation of FIEO, around 8 mn jobs likely to be lost in export intensive industries. There are few industries which are the heavily suffered from havoc (rupee appreciation) are given with available statistics:

Textile and garments	6 lakhs job lost, loss in production capacity-20-25%
Leather	7 lakhs job lost, reduced profitablity-75%
Processed agriculture products	around 20% job lost, cash loss of 15%
handicrafts	8 lakhs job lost, business loss-$ 7.5 bn
Engineering goods	16 lakhs job lost, cash loss- 12-17%
chemicals	reduction in exports-20-25%
Marine Products	reduction in exports-10%

Technical analysis of rupee appreciation:

Here I am trying to explain that how exchange rate affects exporters’ trade, derivation table of price elasticity of demand is given below just go through it once with pen and paper, then you realize quantitatively that how badly exchange rate affects exporters’ trade dynamics.

Look at the eq. 5 also brings out clearly how rising costs and an appreciating local currency can apply pressure on both the cost and revenue sides and render the export trade quite uneconomic.

Let me explain all this with one real time example:

Let’s assume that one Indian exporter exports only to the U.S. How this rupee appreciation affects his business.

P=C/S*(1-1/N) where P is price quote by exporter (in USD).

C is Cost incurred in producing one unit of product (in Rs).

S is Exchange rate Rs/$

N is price elasticity of demand

Year	S	C (in Rs.)	C (in USD)	P (in USD)
aug,2006	46.56	100	2.15	4.30
Jan,2007	44.35	110	2.48	4.96
May,2007	41.39	121	2.92	5.85
Sep,2007	40.9	133.1	3.25	6.51
Jan,2008	39.39	146.41	3.72	7.43

In the table given above, Price quote by Indian exporter is calculated by the formula given above, if we compare the cost of production (C in USD) to the exporter and price quote by exporter to its US customer (P in USD), there is margin that’s ok but I am trying to draw your attention toward the price P(in USD) quoted by Indian exporter to his US customer is increasing every quarter and its marginal change of price (P) in percentage is increasing in every quarter with rupee appreciation. The price quote change in last 16 months is increased by 73% just because of price value of rupee against dollar.

Compare the above workings with that for a Chinese exporter who has not experienced such cost side pressures and also, importantly, benefits from a relatively much more stable currency. The Chinese yuan, for instance, has been allowed to rise around 9 per cent against the dollar in the two years since July 2005 — from 8.28 to 7.51 now — but the Indian currency is up 13 per cent in just the last 9 months.

The Indian exporter will be literally priced out by his competitors who have not experienced such cost side pressures/local currency appreciation and have no bargaining power too.

It is obvious that the Chinese exporter will have a significant price advantage which can be extremely useful in increasing market share — particularly in low value-added items.

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Rupee Appreciation & its impact on Indian Economy

From 2003-07 Indian market is booming in leaps & bounds, today after China India is 2^nd fastest growing economy of the world with a growth rate of 9.4% in the first quarter. It’s a “trillion dollar country surpassed Russia & has become world’s 10^th largest economy, today (till 30^th march, 2007) Indian forex reserve is around $200 bn.

Now the hot bubble floating in every Indian’s mind is “Rupee Appreciation”. From July,2006-May,2007, value of rupee has highly appreciated by 10.7% from Rs 46 to Rs 40.56. There is a big dilemma in everyone's mind, will the rupee appreciation adversely effect our economic growth or is it an indicator of Indian growing economy?

Indian import & export growth rates in March & June 2007 were 34.8% & 18 % respectively which reduced from April 2007 by 6% & 5% respectively.

In our B-school, it’s a hot issue from various perspectives; academics, market growth & placements also. Every friend of ours is discussing about it.

Major reasons of this bubble are:

• Huge foreign Investment in our country

• FIIs Inflow

• ECB borrowings

• Slowdown of US economy

In our country there is 70:30 ratio of import & export respectively (data from commerce dept.) in which major export destinations of India are OCED (USA, EU, Japan) and Brazil & other Asian countries but a large chunk is exported to the OCED countries.

According to an industry analyst - “Every 10 paisa appreciation in rupee negates one dollar upward movement in international prices”

From Importers point of view:

“Rupee at nine years high”-

• Oil companies are highly benefited- more than 80% of crude oil is import gulf and other countries.

According to IOC manager’s statement: “for every Rs1 appreciation crude oil price dip by 2%”

• Recent acquisitions made by Indian companies’ i.e.

· UB group- Whyte & Mackay

· TATA steel-Corus etc these companies are benefited.

• International borrowing (from US banks) by Indian companies.

• Beneficial for country external debts because 10% increase in Rs reduce the debt amount by 10%.

Suppose:

US bank/agency-------------------$100 (2006) ---------------------àIndian company borrowing in Rs term= Rs 4600

Given: $1= Rs 46 (July, 2006)

US bank/agency<-------------------$100 (2007) ---------------------Indian company paying in Rs term= Rs 4000 +interest

Given: $1=Rs 40 (June, 2007)

Here company is getting profit of Rs.600

• Consumer electronic goods, imported apparels etc will be available at cheapest price.

From Exporters point of view:

Around 30% of the exports will surely be affected at one hand. According to commerce ministry report (Oct, 2006) around 86% of export & 89% import deals invoiced in USD. So, in this case exports houses will suffer badly.

Major exports houses of India are:

• IT & ITES industry i.e. (Software, hardware & BPOs), Manufacturing industry (Steel pants, automobile industry, Textile etc), Tourism Industry, Pharma Industry (i.e. Ranbaxy, Cipla etc),

• Hospitals have (cheapest surgeries compared to US hospitals etc), FIIs etc

• Manufacturing Industry: This industry has also suffered as mainly the customers are US companies. But as the raw material is also imported mainly(about 70%) in USD, the import actually has offset the losses due to export to some extent. The loss has forced the industry to cut it workforce by 11,000.
  

• Hotel companies (Taj Gvk, ITC hotels etc) are set to loose as 50% of their revenues are in dollars.

Govt. initiatives to protect exporters:

• Tax incentives, interest reductions, reduction in service taxes

• Export duty reduction & waive custom duty
• Forward contracts will also be beneficial for exports to protect themselves from losses.

Conclusion-

Currencies	Year (may, 2006)	Year (July, 2007)	Change %
Rs in terms of USD	46.2	41.05	11.12%
Rs in terms of Euro	59.05	55.35	6.26%
Rs in terms of Yen	41.1	33.20	19.22%
Rs in terms of Pound	86.55	82.20	5.02%

According to the given above we can conclude that rupee is appreciating with all currencies given above which reflects that Indian economy is doing very well, though it carries with it certain demerits (mentioned above). But these demerits can be worked upon and transformed into a blessing for the economy.

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