Volatile rupee, Chinese support not helping exporters

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Bikky Khosla | 20 Oct, 2009
The problems for exporters seem to be never-ending. As the global markets were showing some signs, whatsoever, of improvement, the current appreciation and volatility of the rupee against the US dollar, owing to robust capital inflows into the stock markets, has risen its ugly head and small exporters are likely to be hit most if this trend persists for long.

For the global economy slowly emerging from a deep crisis, the sharp decline of the dollar vis-a-vis the major currencies is not a healthy indication. It's not a good news at all and if the dollar falls further it may wipe off the recovery that the global economy is showing.

The dollar's weakness is being reflected in the rupee's strength and with the rupee trading just above 46 to the dollar, this appreciation is naturally a matter of deep concern to exporters.

For obvious reasons, the volatility of the rupee and relative strength of Asian currencies is giving nightmares to the export community, which is working on leaner margins in the current scenario. The volatility of the Indian currency is now becoming a severe headache for the exporters whose net realizations stand to fall into a negative zone.

If this was not enough, the support given by China in the form of 17 percent export VAT rebate has also come as an obstacle in converting export inquiries into orders.

Meanwhile, despite double-digit growth in industrial output and building inflationary pressures, I don't see the the Reserve Bank of India (RBI) tightening liquidity in its policy review next week. And perhaps the apex bank has its own reasons too, because to prevent rupee appreciation it has to intervene and buy dollars, which in turn will fuel inflation. It will perhaps not be the best policy choice because in case of higher inflation, RBI then will have to raise interest rates and mop up liquidity. Monetary tightening when the economy is just recovering will only negate the recovery process.

But then how do we help the small exporters? One could be an increase in drawback rate or cheaper dollar loans as against LIBOR +3.5% as demanded by a prominent industry body.