The Hindu Business Line : Will rupee billing help exporters?

THERE is a clamour from exporters and export promotion agencies for rupee billing. The FIEO (Federation of Indian Exports Organisations) and the EPCH (Export Promotion Council for Handicrafts) are reported to have approached the RBI for such permissions. The issue is also being debated hotly in the media.

This, it is hoped, will protect realisations on India's exports in these times of a persistently falling dollar — the country's chief currency of invoice.

One is not certain if rupee billing is prohibited even as of now. Regulation 3(1) under FEMA notification 14/2000 - RB dated May 3, 2000 permits the authorised dealers to receive from overseas banks — other than Asian Currency Unit (ACU) countries where a separate arrangement works — the proceeds in rupees (besides in any freely convertible foreign currency) against exports from India. Regulation 3(2) mentions that payment shall be received in a currency appropriate to the place of final destination. There is no mention that rupee is not an appropriate currency; if it were so, the wording would be "permitted currency". Regulation 4 effectively permits foreigners to pay through credit cards here against bills drawn in rupees.

The intention to prohibit rupee billing, if any, is not borne out by the language. Such restrictions make sense only if there is a dual exchange regime, or when trade/current account transactions are taxed or impounded for shoring up currency values, for billing in the foreign currency fixes the exact amount for deciding incentives or disincentives. India is well past that stage. Even in such cases, restricting the billing currency may not be the optimum way to achieve the goals.

The issue rests more with the Customs' insistence on declaration and eligibility of export incentives being based on the amount of convertible foreign currency received. These are matters to be sorted out by the Directorate-General of Foreign Trade. But despite several representations from trade bodies, there is no cut-and-dried direction.

Setting aside the issue, will it really help exporters? The appeal seems hopeful at best.

First, conventional wisdom says that whether you state the price of rice as Rs per kg or grams per Re, the price is the same. Demand and supply determine price rather than how the price is quoted — directly or inversely. Will this be hold good in the case of the dollar's price?

The demand and supply of dollars depends on the competitiveness of India's production (for exports or for combating imports), inflation, interest rates, the degree of convertibility, the attractiveness of stock market PE ratios, and so on.

It is difficult to imagine how these are influenced by the currency of billing. However, one factor that can greatly influence the rates (at least forward premiums) is the vastly different approach to risk management here and abroad.

Second, it is naïve to expect that importers abroad will keep paying higher and increasing dollar prices as the rupee appreciates. Any sensible buyer will calculate his prices in his home currency and bargain for lower prices anyway.

Third, an ability to hold prices — be it rupees or dollars — depends on the strength of brands and customer loyalty.

In the absence of this in most major areas of exports, such as textiles, gems and chemicals, and also due to the presence of many small players, overseas buyers have called the shot. The small players kept cutting the prices when the dollar appreciated, eventually forcing even the bigger ones to fall in line. But now that the tide has turned, India wants to shift to rupee billing. But will the customers agree?

Lastly, thinly traded currencies always attract high buy-sell margins from bankers. It will be more economical for the exporters to convert the dollars into rupees here than the foreign buyer trying to convert dollars into rupees, say, in Sydney, Durban or Brazil. The high currency margins will add to the buyers' prices which will ultimately be lopped off from the margins.

Risk management practices

By shifting to rupee billing, the onus of currency risk management shifts to the overseas buyers. There is a significant and qualitative difference in the currency risk management of the MNCs and many overseas buyers compared to Indian companies for whom the prevailing market mood becomes the corporate policy.

The MNCs and overseas buyers have a well-defined and tight risk management policy which is rigorously implemented. They stick to the core competence (say, engineering) and do not make money on the side by assuming non-core risks which are largely "frozen" on the day of transactions.

In fact, this behaviour of minimising non-core risks by hedging is a dominant reason why futures and options markets abroad are highly liquid and developed.

If the overseas buyers were to manage the rupee-dollar risk for their imports from India, then it is likely that most of the exports will be covered in the forward markets. This will add to liquidity in the forward markets. But this is what the exporters should be doing anyway given a persistently falling dollar.

The influence on the forward premiums will, however, be vastly different if India insists on rupee invoices for its imports. Due to their policies they will most probably fully cover their exposures and there will be a significant increase in the volumes pushing up forward premiums. Even if the impact is 50 per cent of theoretical levels, it would mean 2-2.5 per cent additional realisations to the exporters, given the interest rate differentials.

While it is uncertain that rupee billing will benefit exporters at a time of near complete current account convertibility when the exporters decide freely on write-offs, time extensions, and price reductions, the current rules in customs and for eligibility for export incentives look very archaic. The DGFT or the Commerce Ministry can easily do away with the stipulations.

(The author works for a large chemical manufacturer-exporter. The views are personal.)

More Stories on : Exports & Imports | Forex

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Trade impact of EU-25

Money on a merry-go-round — The recycling of poor country resources

Barbarism in Iraq

Short-term pressures on management

Options for the week

PURA: Emulating the Silicon Valley

Will rupee billing help exporters?

Agricultural subsidies

IPO payment system