Exporters see not much gain from rupee fall

A weaker rupee is not translating into big gains for exporters and higher export volumes may not necessarily narrow the current account deficit (CAD).

Exporters are now finding themselves at the negotiating table with customers who are looking to readjust forward contract rates with the prevailing currency rates.

Ajay Sahai, director general & CEO, Federation of Indian Export Organisations (FIEO), told DNA Money with slide in the rupee buyers are bargaining hard for discounts. And since most domestic exporters are in "buyers' market", they are compelled to relent.

This, he said, was resulting in lower remittance of dollars into the country and could widen the CAD further and keep the rupee unstable.

"If currency depreciates, buyers ask exporters to reduce the price. In most cases, exporters give discounts to some extent of the gains from currency fluctuation. Therefore, they will get the same amount of rupee or slightly higher amount but the country will not get the same amount of dollars," said Sahai.

Giving an example, he explains how it will lead to a loss for the country.

If an exporter was selling at $1 per piece and getting Rs 65, with a weaker rupee, he may cut the price for customers. Supposing he takes dollar equivalent of Rs 65 per piece, the country will get lesser than a dollar per piece.

Endorsing Sahai's view, A Sakthivel, vice chairman of Apparel Export Promotion, said with almost 70% of export orders done in forward contracts, they get revised in the event of wild currency fluctuation.

"We did not know the rupee will be this weak. So, most of us put forward contract at 68. We do 60-70% forward contract and 30% is done at the spot rate. Nobody expected the rupee to go to 72. So, when we send the bill to buyers, they negotiate for a discount. We have to oblige them as that gives us the cushion for future orders," he said.

According to Sakthivel, the rebate to customers is generally more than 50% of the gains to exporters due to the currency downswing.

However, the leading apparel exporter, who has a high content of imports in his exports, said he did not get a similar rebate on imports. Sakthivel said most imports were done on spot rate and costlier imports increased the cost of manufacturing.

"Our manufacturing cost has also gone up as we use petrol and diesel for transporting raw material to our production facility and sending goods to ports. Plus, we use dye materials, which has petroleum, for manufacturing. Depreciation of rupee and and higher crude prices in the recent past have made all these things costlier," he said.

The apparel exporter said rebates to buyers on account of currency volatility and costlier imports were "nullifying" a large part of the gains from a weaker rupee. He also expects CAD to deteriorate further as dollar outflows rise faster than the inflows.

In the April-June quarter of this fiscal, the net outflow of portfolio investment was $8.1 billion compared with $2.3 billion inflow in the previous quarter.

"CAD will further increase as our imports are mainly petroleum products and it is rising very fast. I can say comfort for exporters is just 20%. This is likely to create a big gap between dollar outflow and inflow," he said.

Recently, the rupee tumbled towards a historic low of 73 against the US dollar as global crude prices jumped to $80 a barrel and US-China trade war escalated. India, being a net importer of oil, has seen its oil import bill shoot up 5.6% in the April-June quarter of the current fiscal. Exports have also moved into positive territory but are lagging imports. This has widened the trade deficit.

As a result, the CAD came in at a four-quarter high of 2.4% of the gross domestic product (GDP) during April-June period of the current fiscal, up from 1.9% in fourth quarter of last fiscal. Rating firms like Icra and Kotak Securities are projecting the current fiscal to end with a CAD of 2.8% and 2.9%, respectively. This would, however, still be lower than the almost 5% CAD in 2013.

Sahai revealed the import intensity of India's total exports, or imported content used in exports, was almost 60% at present. According to him, it was very high in sectors like petrol and petroleum products, gems and jewellery and electronic goods, and had only risen in the past 10-15 years. This was negating the benefits coming from a depreciating rupee.

He also said since Indian exporters continue to operate in the buyers' market; they do not have much bargaining power.

Additionally, in metals, commodities and agricultural products, exporters from Latin American countries and South Africa had an edge over India as their currencies have depreciated much more than the rupee.

"When it comes to Asia, we are one of the worst-performing currencies, so we have a competitive edge. But when it comes to metals and commodities, Argentina, Brazil and South Africa are more competitive in terms of currency rate," Sahai said.

He said exports of services like information technology (IT), tourism and others are likely to profit from a weaker rupee as they have very low or no import component.

Raj Kumar Malhotra, managing director, Asian Handicraft, summed up, "Exports may not increase as much in value terms as in volume terms."

Sahai added that easing in the rupee value also involved the cost of speculation that exporters have to bear. Speaking on behalf of domestic exporters, he advocated a stable currency for healthy exports and the country's trade balance.

"As exporters' organisation, we want the rupee to be stable. I am not saying there should be a single rate or a particular rate. It (currency rate) should vary within a band – say within a band of plus or minus 3-5%. That is good for both importers and exporters. If there is huge volatility, it will add to speculation, and there is a cost of overcoming the speculation that exporters bear," he elaborated.

NOT MUCH TO CHEER

50% 
Of the rupee gains to exporters are going to customers as rebate

2.4% 
Current account deficit during April-June period, a four-year high

$8 bn 
Net outflow of portfolio investment during the April-June period

...& ANALYSIS

• The rebate to buyers is generally more than 50% of the gains to exporters due to the currency downswing
   
• Exporters' discounts could likely to hit dollar inflows; higher export volume may not translate into narrower CAD