Experts on Re: Exporters favor exchange rate hit to P&L hit

The rupee’s fall is intriguing since it has come despite a 27% fall in crude prices from April 1 i.e. YTD. So why is the rupee getting singled out for such attacks? How will other macros in the country like the current account deficit and fiscal deficit change because of the rupee? More importantly, where and when does the rupee’s fall get arrested?

CNBC-TV18’s Lata Venkatesh speaks to Samiran Chakraborty, chief economist at Standard Chartered Bank, Ajit Ranade, chief economist at AV Birla Group and Moses Harding head of treasury at IndusInd Bank to discuss the challenges ahead for the rupee.

Below is an edited transcript of their interview. Watch the accompanying videos for more.

Q: The stock market has fallen barely 3% from March 31 for the year FY13 and on the week actually it’s a minor gain. Why is it that the rupee has fallen actually by about 14% YTD? In the stock market, people are giving credit to the fact that lower commodity prices, in particular crude is going to improve margins, OPMs and therefore EPS. Should not the same credit be given to the rupee? Why is the rupee such a rank underperformer?

Chakraborty: The focus of the market at this point in time is not on crude at all from the FX market perspective. It’s more looking at global events and event risks globally. Partly also looking at the dollar strength across the board that is impacting the rupee and partly the issue of a fear of a ratings downgrade, a balance of payment (BoP) crisis situation, a kind of macro instability.

All these are affecting investor sentiment on the FX market particularly. The fact that there has not been very strong intervention from the RBI to stem the rupee depreciation has kind of fuelled the idea that possibly the central bank is okay with some amount of rupee depreciation. All of these factors are primarily driving the FX market dynamics which at this point of time is focused on oil.

Q: The RBI governor in the monetary policy statement and his post-statement speech seemed to indicate that rupee depreciation has a growth boosting dimension to it, giving an impression that the RBI is okay with it and its actions also seemed to indicate that. Is the RBI intervention the big reason or are there other concerns that FII flows may vanish or why aren’t exporters selling?

Harding: The exchange rate movement comes from four quarters. One is the day-to-day flows from the corporate, then the capital flow from FIIs and the third is the un-hedged portion of the foreign currency liabilities. Fourth is the most important which gives the value to the rupee on a forward basis. So that gets into the sentiment angle. The forward segment can be a demand or supply driven mode which again carries over to spot.

A combination of all these forces provides direction to the spot rupee. When you say it’s not in relation to the Sensex it means that FII flows have come in into the Sensex whereas the spot demand and forward demand has been more on the exchange rate margin. That’s why there is no correlation. I think ideally rupee weakness is good for the economy as long as current account is positive along with low inflation.

Q: At 57, why is it exporters are not coming and selling? At some level, one would think it will balance out. On Friday did you notice that?

Harding: Two things here. Number one, you don’t know where the bottom is, whether it’s 57 or 60 or 65, nothing, because we have not seen the RBI’s verbal intervention. Nobody talked from the RBI or the ministry when the rupee broke 57. Number two, exporters are already short all the way from 44 and they are taking a P&L knock on the mark-to-market. Now there is a trade-off between whether I look at the exchange rate hedge or I cover my P&L. In that case, people prefer to protect P&L rather than covering their exchange rate risk.

Q: From the point of view of India Inc. the Reserve Bank Governor painting a macro brush said that rupee’s depreciation is growth boosting, that is something which as an economist you will always be looking at. But as a person who sees corporates at close quarters, is it really positive?

Ranade: The big reform in 1991 apart from the Industrial De-Licensing was actually freeing the rupee. The rupee was actually severely devalued from roughly 15 to 30 in one go. If you take the rupee at 31 in 1991 and today at 57, over the 21 years it’s moved by less than 100% and that works out to be at an annual average depreciation of 2.6%. From that perspective it is in fact an inflation differential between the US and India.

If we see, the 1991 reforms as essentially promoting economic reforms and industrial activity in India, in a way by stealth this 20% depreciation in the last 12 months actually almost tells us that some kind of reforms have taken place. That is one way of looking at it. Out of imports, the three items i.e. gold, oil and capex take up almost 64-66% and these three are somewhat price insensitive. Therefore, the import demand tends to be somewhat inelastic although capex has now been postponed somewhat.