The Hindu Business Line : `Price action in rupee market seems to have overextended'

Chennai May 22 Variation in exchange rates does not pose a risk to growth in the near term, according to Mr N.S. Paramasivam, Head of Forex & Treasury, Essar Group.

Speaking to Business Line on issues surrounding the strengthening rupee, he said that India's growth of 8-8.5 per cent in the last fiscal was achieved despite the sharp rise in the domestic currency against the US dollar.

"Comparatively, China is growing at 9.5 per cent, supported by an undervalued currency to boost export growth. So, there is no risk in the near term."

The rupee's appreciation is of major concern mainly to software exporters and IT-enabled services, as they are expected to take a topline hit. "This hit of 2-3 per cent will get reflected in the first-quarter results."

However, he added, the rise in commodity prices has helped exporters in the manufacturing sector neutralise the negative impact of rupee appreciation.

Best performer

The domestic currency has been the best performing in Asia, appreciating by over 7.5 per cent in the current calendar compared to 2-3 per cent in the case of most other currencies.

"The price action in the rupee market seems to have overextended, aided by lack of intervention support from Government banks from the middle of March 2007."

The rupee touched a nine-year high of 40.53 on May 7.

"The overvaluation in the rupee exchange rate on REER (real effective exchange rate) basis has crossed 15 per cent, as per the 6 currency trade-weighted, multiplicative real exchange rate index (JP Morgan index) for the INR having FY 2003/04 = 100 as the base."

REER is defined on www.investopedia.com as `the weighted average of a country's currency relative to an index or basket of other major currencies adjusted for the effects of inflation.' The weights are determined by comparing the relative trade balances, in terms of one country's currency, with each other country within the index, says the site.

According to Mr Paramasivam, further sustained appreciation may possibly hamper double-digit growth in exports in the current year.

"Exporters have started to voice concerns on the rising rupee affecting their competitiveness in overseas markets. It has already squeezed the margins of exporters in textiles, garments, gem and jewellery."

He also said that a drop in WPI-based inflation to around five per cent remains a crucial factor in triggering a sharp correction in the nominal exchange rate.

"The Reserve Bank of India recently increased the limits for issuance of bonds under the market stabilisation scheme from Rs 95,000 crore to Rs 1,10,000 crore, making room for its intervention at the appropriate level."