Exports from a country are first to get hit when its currency begins to gain strength against the US Dollar. India is no exception. So far this year, Indian Rupee has appreciated more than 5% against US Dollar.
Rudra Sensarma, professor of economics, IIM Kozhikode said, “Since most exporters use short term forward contracts to hedge their forex exposures, they would be unfazed by the strengthening rupee unless it significantly drops below the 65-68 range it has been maintaining for more than a year."
However, India Ratings believe that a sustained currency appreciation can negatively impact the operating profitability for export oriented sectors due to the un-hedged trade exposure of up to 44%.
Yet the impact on operating profit will be marginal somewhere near 2% as analysts expect a pick-up in merchandise exports driven by the recovery in global commodity prices, better demand conditions in the United States and the EU reflected in the improving consumption will aid to overall export growth.
In the last two months of FY17, merchandise exports have reported a double-digit growth mainly on account of recovery in global commodity prices rather than higher volumes.
Data compiled by Ministry of Commerce showed merchandise exports to the United States and the EU in March 2017 increased 8.99% and 9.27% on year-on-year (YoY) basis.
These merchandise exports rose for the seventh consecutive month in March at 27.6% yoy led by both oil (69.1% yoy) as well as non-oil (23.2% yoy) exports and reflected the second consecutive month of double digit growth (February: 17.5% yoy).
Also, Indian passenger vehicle and MHCV registered a volume growth of 16.2% and 24.2% in FY17. Among these growth a large shipment was made to the US and EU thus reflecting supporting demand.
However, India Ratings said, “It is possible given the depreciating bias which was prevalent in December 2016, the hedging practices may have titled towards unhedged exposures and the recent appreciation could provide negative surprises, more than anticipated.”
“While the impact of a depreciating currency is likely to be much more negative than that of an appreciating currency, volatility of the currency could provide greater surprises on both sides. Given the macro fundamentals and the capital flows, Ind-Ra does not expect the volatility to be the order of the day,” it added.
Source: Zee Business