Exporters unable to leverage rupee depreciation to boost export order value: Industry

The rupee may stay under pressure in the near term.

Despite the rupee hovering around 83.40 to the dollar, exporters are not able to leverage the price competitiveness to boost exports due to a paucity of foreign exchange with India’s major export destinations, stakeholders said.

“There is a forex crisis in Bangladesh, the biggest trading partner with India for engineering goods. There is a tremendous dollar shortage in that country. Exports are not growing to Bangladesh, on the contrary its gone down. We are exporting to Latin America, African countries, they all have a problem of foreign exchange. It affects our exports, we are not able to grow exports substantially,” Arun Kumar Garodia, chairman, Engineering Exports Promotion Council of India (EEPC India), told Moneycontrol.

India’s engineering exports in the five months to February rose by only 2 percent, he said.

“Countries like Zambia, Kenya, Tanzania, Mozambique, Nigeria, Angola and Latin America are facing dollar unavailability. Exporters are facing huge cash flow challenges, the major issue being the availability of foreign currency in these countries,” Sandeep Modi, joint secretary, Federation of Pharmaceutical and Allied Products Merchant Exporters (FPME), told Moneycontrol.

The cause of the dollar shortage in these countries can be traced back to their balance of payments deteriorating.

Rupee trade

The rupee trade—where payments are made by buyers in the domestic currency via a vostro account —allowed by the Reserve Bank of India (RBI) to override such challenges was a welcome step but it is not yet applicable to these countries.

“Rupee trade in these countries is not fully operational. The ministry of external affairs and the RBI should form a joint task force and take this ahead,” FPME’s Modi said.

Rupee trade is currently functional with Russia, the United Arab Emirates and Sri Lanka. In July 2022, the RBI allowed the settlement of India's international trade in rupees for which authorised Indian banks open vostro accounts. When an Indian exporter has to be paid for goods and services in rupees, this vostro account held in the trading country will be deducted and the amount credited to the exporter's regular account.

“Although the RBI has allowed rupee trade, it's not happening with many destinations, including Bangladesh, Africa and Latin America. There has to be repeat export and imports in rupees through the vostro accounts so that the currency accumulated can be adjusted. As an example, in the case of Kenya, if the exports are done in rupee, Kenya needs to export to India in rupees but Indian importers are not keen on rupee trades. Bangladesh is reluctant for rupee trades as they do not do major exports to India, so how will they stock rupees?” EEPC India's Garodia said.

Rupee stability 

Given the ongoing strength in the dollar and elevated crude oil prices, the rupee may stay under pressure in the near term. The rupee has been hovering around record lows for the past few months. Remarks from the US Federal Reserve hinted that it may lower the interest rates this year. Robust demand for dollars from importers and a widening trade deficit have kept the rupee in a limited range of 83.00-83.45.

“If the rupee remains stable over a long term, it helps exporters as negotiations are made accordingly. Volatility is never good, short-term rupee fall doesn't help. However, 50 paiea-plus or minus doesn’t make much of a difference. Also, when the rupee depreciates, buyers seek discounts,” said Anas Mullaveetil, an exporter of perishables to the UK, Middle East, etc.

He and others like him face price competition from countries like other Asian countries dealing in the same produce.

“When the rupee depreciates, my exports should be seen more. Unfortunately, the bargaining power has increased for buyers. They seek discounts. So is the case with  exports of processed food items where countries like Sri Lanka, Philippines and Thailand are our competitors,” Munshid Ali, secretary, Kerala Exporters’ forum, told Moneycontrol.