Exporters should hedge a sizable value of their orders to safeguard themselves from currency volatility, says Ajay Sahai, DG & CEO of the Federation of Indian Export Organisations (FIEO).
Amid a turbulent phase for the Indian currency, Sahai’s advice for exporters is to not look at currency fluctuations to corner profit. It should just be treated as icing on the cake and they must safeguard themselves by hedging, as currency volatilities can be tricky, he says. One never knows when the trends will reverse. As much as 50-70% of the order value should be hedged, and not kept open ended, he says.
The Indian rupee, which lately has been on a continuous downward spiral against the dollar, breached 80 per dollar for the first time ever on Tuesday. Experts fear the rupee depreciation would be steeper now. As the dollar is the world’s most important currency, any movement in it has a serious bearing on cross-border trade.
For the country’s exim (exporters and importers) community, a soaring dollar affects them in multiple ways. Principally, rupee depreciation against the US dollar is good for Indian exporters as the proceeds are realised in dollars. A surging dollar means gains for Indian exporters as they get more rupees for every dollar. So they may now get bigger margins.
Sahai says a surging dollar is good news for exporters because if the dollar was not rising and other currencies were facing sharper depreciation, we would have been outpriced. However, one needs to look at the phenomena of the surging US dollar from a larger standpoint. “If competing currencies like those of the Philippines, China, Japan and South Korea are depreciating at a faster rate, India would lose out to these countries in its relative competitiveness. When we talk about depreciation, we just cannot look at the surface. One also has to see what is the trend for competing currencies. If they are depreciating at a faster pace, we would have to take it with a pinch of salt,” he says.
There is another dimension to the issue. While the rupee is depreciating against the dollar, it is hardly the case against the euro or other currencies. So, if we export in euro or other currencies, we are bound to feel the pinch, the FIEO chief says.
Other industry stakeholders echo a similar view. Rakesh Kumar, Director General-Export Promotion Council for Handicrafts (EPCH), says exporters of handicrafts can reap benefits with an increase in dollar as the handicrafts sector is using indigenous raw materials and has a low dependence on imports. As international trade is predominantly done in dollars, handicraft exporters can now enjoy higher margins, he says. “But the cost of participating in international fairs will increase with the strengthening of the dollar.”
A stronger dollar also means that the cost of imports will go up, resulting in higher input costs and inflation pressure for domestic manufacturers. Imports of critical inputs, including petroleum products, also become dearer. As a result, a higher cost of production is the main apprehension of several exporters.
Vikas Singh Chauhan, Director, Home textile Exporters Welfare Association (HEWA), cautions that the fuel bill will see a drastic spike, imported cotton yarn’s prices will go up, and accessories like buttons and outer elastics will also be dearer. “The dollar/INR exchange rate has touched new heights, which is good news in the short term as buyers are enquiring about Christmas orders. Overall, in the short term, exporters are able to quote orders aggressively. But in the long term, the surge will hurt us because of inflation. We have already witnessed a tremendous rise in raw material costs until the last quarter,” Chauhan says.
As he sees it, too high or too low a jump in any currency ultimately leads to inflation pressures for manufacturers. For now, however, exporters in his segment are upbeat. “The jump in trade enquiries is up by 100%. Compared to Bangladesh and Pakistan, we are doing aggressive marketing. We will see a massive jump in textile figures in this coming quarter, thanks to decreasing cotton rates, surging dollar and schemes like RoSCTL.”
Impact on Xmas orders
The EPCH chief says Christmas orders are normally booked during spring and so the goods are under production now. These come out by the end of July or the first half of August. Hence, the orders would result in higher rupee realisation at this stage. “In the short term, there will be a marginal impact on orders as the prices of export products have been already decided and buyers are trying to negotiate prices to further surpass the benefit with mutual understanding among both parties. In the long run, a rise in prices will make the export product more competitive if domestic inflation is controlled by the RBI and prices of raw materials are stabilised,” he adds.
FIEO’s Sahai says the consumption pattern is against shifting to services and is affecting demand. Inflation is very high and advanced economies are on the verge of a recession. “So, demand has taken a hit. We still have a good order position for the Christmas season but it is lower compared to last year. Orders have declined by 10-15%,” he says.
(With contributions from Neha Dewan and Garima Bora)