The Hindu Business Line : Meandering thru appreciation

“And that takes care of your queen,” exulted 23-year-old Preeti, as she removed her opponents piece from the chessboard. Sridhar Rajesh, the 32-year-old exporter of textiles, looked on morosely. “What’s the problem?” asked Preeti. “You usually play so brilliantly.

Export worries

Sridhar scowled, “The rupee has appreciated against the dollar again today. Eightyfive per cent of my exports are to the US. The rupee has appreciated by nearly 9 per cent against the US dollar in the past six months. Looks like I am going to have a bad quarter this time.” They were sitting in their favourite hangout at Brigade Road. They usually sat sipping cups of freshly brewed coffee while discussing various issues under the sun.

Suddenly Preeti waved her hands excitedly as she spotted her mom near the counter. Sharada Vishwanath came over, holding shopping bags.

“I just finished shopping Preeti, so I thought I’ll refresh myself with some coffee. You have told me so many times about this place, so I thought I’ll check it out.”

Preeti performed the introductions. Sharada pulled up a chair and sat down. “God, the prices of vegetables are so high these days,” she muttered.

“There is your answer, Sridhar,” said Preeti.

“With inflation rising, the Government became concerned and the RBI had to raise interest rates and hike the Cash Reserve Ratio (CRR). This increased the cost of borrowings, credit growth declined, and liquidity was squeezed from the market, thus resulting in a fall in demand. This should have ideally resulted in the prices of goods coming down inflation dropping.

A different scene

“But this time around this did not happen as the corporates turned to overseas borrowings and foreign money inflows by way of external commercial borrowings flooded the markets, providing the necessary liquidity and, therefore, inflation could not be controlled to a large extent.

“Both foreign direct investments (FDI) and external commercial borrowings (ECB) have risen sharply. This excess supply of money in dollars strengthened the rupee against the dollar.” Sharada looked on bewildered. Srinivasan, stockbroker and financial advisor of Sridhar, had by then joined them. He ordered strong coffee. Meanwhile Sridhar moved his knight towards Preeti’s queen.

Srinivasan added, “Major Indian stock indices have been able to scale new peaks because of the recent appreciation in rupee value. It has been proved beyond doubt that there is a strong correlation between our stock indices and the parity value of the rupee vis-À-vis major currencies such as the dollar. Analysts point out that last year, the Sensex- rupee correlation was around 80 per cent against the 30-40 per cent seen in the earlier three years. FIIs which have heavily invested in India are reluctant to sell off mainly because of the appreciating rupee.”

“Thank you,” he said to the waiter who brought him coffee. He sipped it and grinned. “The coffee is amazing here.”

Meanwhile, Sridhar, still looking at the chessboard, countered: “Do you realise how badly exporters have been hit by the appreciation of the rupee? The IT and the services sectors will lose their competitive edge if the currencies of their major global competitors do not appreciate as much as the rupee.”

“But Sridhar, it doesn’t make much of a difference to the bigger players who have a diversified client base. The rupee has not risen against other currencies, such as the euro, as much as it has against the dollar, implying that those exporting to countries other than the US and where the transactions are done in euros, pounds or other currencies, are in a better position .You should look at targeting more non-US clients,” remarked Preeti, as she moved her queen away to a safer position.

Common man’s angle

Sharada interrupted, “All these things are beyond me. What about the view of the common man. How does the rupee appreciation affect him?”

“Look Sharada, an appreciating rupee reduces import costs and thereby, lowers the production costs, and thus make available the goods at competitive prices,” explained Srinivasan.

Sharada nodded her head. “I think I am beginning to understand, but what are the causes of the rupee appreciation. Can anyone explain?”

Eager to show off her B-school acquired knowledge, Preeti began, “See mom, other than the RBI, which raised interest rates and CRR, the other factors for rupee appreciation could be the effect of increased globalisation. Changes in the prices of commodities in US and Europe now affect domestic prices too. Also, there has been rapid credit growth, which has risen by 30 per cent per year in the last three years. Food supply shortages and development of the commodities market could be the other reasons.”

“Dude, don’t day dream, it’s your move,” she chided Sridhar who seemed lost in his own world.

The gainers

“So who gains by the rupee appreciation other than the common man?” he asked while moving his pawn forward to support his attacking rook.

“Well, rupee appreciation is welcomed by those companies with overseas borrowings. Significant levels of foreign currency — especially dollar-denominated loans — generate forex gains because of reduced interest payout occasioned by the rising rupee,” explained Srinivasan. “Anyway this steady appreciation can be controlled?” asked Preeti, for once at a loss.

Srinivasan continued, “An option is to control the inflows of foreign funds, through more regulations on raising money overseas by Indian companies. Now this would be seen as a reversal of the liberalisation process and would not send the right signals to the business community both at home and abroad.

“Maybe liberalising the remaining controls on outflows would help. This measure is aimed at countering the excess inflows by increasing outflows to strike a balance in the net inflows. Things have changed drastically and the economy has become more market driven and less controlled, perhaps a fallout of globalisation.”

The waiter brought them the bill. “This place is expensive,” said Sharada. “Checkmate,” exulted Sridhar suddenly. “Something to cheer about at last. Preeti, since you think that the rupee appreciation has countered inflation, let’s see you pay the bill for all of us,” he said jauntily.

Preeti scowled while all of them laughed heartily.

Racy@TheHindu.co.in

http://Racycases.blogspot.com

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