The Indian currency has gained strength for the six straight session. In fact the rupee is up 12 percent from its record lows in August 2013. While that may be appealing to foreign investors, many believe it's not good news for exporters - especially coming on the back of declining exports in February, the first contraction since June 2013.
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However, Sanjay Lalbhai, chairman and managing director of Arvind does not see foreign exchange volatility impacting the company’s earnings. He is certain that the company will be able to maintain FY14 revenue growth guidance of 27 percent.
Lalbhai says the textile sector as a whole is kind of insulated by strong domestic demand. Cotton, the main raw material, is linked to international prices, he adds. So when rupee appreciates, cotton and yarn prices go down, he explains. The disadvantage is only on value addition, he says. On the other hand, when rupee depreciates, cotton prices go up, it hurts in the domestic market, because the price hike cannot be passed on to the consumers immediately, whereas as far as exports is concerned it is naturally hedged. He believes as long as the rupee does not breach 53-55 per dollar, atleast the textile sector will continue to remain competitive.
Siddharth Sanyal, chief India economist of Barclays too agrees with Lalbhai. He says that at current rupee levels, exports won’t see much of an impact. He adds in the overall exports pie, there are 2-3 different segments – one, exports with strong import content, example: petrochemicals, gems and jewellery; where the rupee factor is not very strong and it gets nullified. The other more important segment is the services exports or IT exports, which are exported on a dollar billing structure, even in that case for every uptick or downtick companies don’t see major loss in revenue, at the most there is a little addition or subtraction in profitability. The only segment or sectors where it might impact are the ones which are competing with some of the other currencies (at the margins), but that’s not a huge part of overall Indian exports. So that too isn’t an issue, he adds.
Lalbhai believes India’s major competitor is China and China’s currency has appreciated by more than 20 percent and the rupee has depreciated by 20 percent in the past year. He does not think the kind of appreciation that the rupee witnessed in the past week will impact exports much. However, if the currency moves by 5-6 per USD, then questions on competitiveness vis-à-vis countries like Bangladesh might arise. He says as far as textiles are concerned, India is very competitive. So short term impact is likely to be negligible.
Sanyal believes long-term overall movement in Balance of Payment, current account deficit, or trade account is favourable for India. However, he adds growth is not completely out of the woods. There some green shoots, but he is still not confident that it can take shape in the next 3-4 months. It may take longer, he adds.
Sanyal expects the Reserve Bank to replenish its stock of reserves and start buying if and when rupee starts gaining strength and starts rising above 61.
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