Re appreciation giving exporters nightmares

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Bikky Khosla | 12 Oct, 2010
With the continuing rupee appreciation eroding the competitiveness of exporters in the global market, the Reserve Bank of India (RBI) has rightly cautioned that it will intervene if foreign inflows are 'lumpy and volatile'. The statement had calmed the rupee a bit on Monday, but for exporters sailing through the rough weather of low demand, the appreciation of the rupee has really hurt them hard. The situation does not end here. With a stronger rupee not only are exports becoming uncompetitive, India is being flooded by cheaper imports too, which is a major concern as well.

The rupee, which has gained about 5.7 percent since the beginning of September, and was trading at its five-month high on Monday, is not what exporters would like to encounter at this juncture. I think FIEO who is slated to take up the issue with the government when they meet next week, should ask the government for credit at lower interest rate and an increase in duty drawback rates by 2 percent for all export sectors for a limited period, say a year or so, to impart competitiveness to the exporters' products.

I feel the government should also extend the benefits of Market Linked Focus Product Scheme (MLFPS) for shipments to the US, particularly to certain sectors. The scheme has already been extended to garment exports to Europe till March 31, 2011. With the US markets too not performing well, the benefits of the scheme can thus be extended to the US as well.

Experts are also indicating that the volatility of the rupee is likely to remain in the near future owing to FII inflows into the domestic market, which is playing a key role in influencing the rupee's direction. For instance, so far in 2010, FIIs have invested a net $21 billion in Indian shares, adding to last year's record USD 17.5 billion inflow. This gives a fair idea that the current trend of an appreciating rupee is likely to stay. As such, either RBI will have to rein in the rupee's climb, which is most unlikely, or else, the government should provide some sops that can help exporters to remain competitive despite a stronger rupee.