Rising Exports May Cushion Rupee Against High Crude Prices.

The consistent month-on-month increase in exports is expected to absorb the pressure on the rupee from rising oil prices, economists said.

Oil forms the largest chunk of India’s imports and rising crude prices hurt the rupee as the country would have to pay more in dollars to buy oil.

But the rupee has appreciated in the past few months on strong exports. It strengthened to 44.58 per dollar on 31 March from 45.93 at the end of November despite Brent crude May futures rising to $119 per barrel from $88 in that period.

The rupee hasn’t traded since 31 March as the money markets were shut on Friday because of the annual account opening and on Monday for the Maharashtrian new year.

A strengthening rupee hurts Indian exporters as they would get less in the local currency per dollar on the goods or services they sell. A weak rupee would affect importers as they would have to pay more in the local currency for the goods they ship in.

Economists said the rapid rise in exports will prevent the rupee from falling much, even if oil prices rise further.

The rise in exports is likely to support the rupee at least in the short term, said Samiran Chakraborty, head, research, India, at Standard Chartered Bank Plc. “Though the break-up of exports is not yet out, the rise in exports looks like it is primarily due to new goods like engineering and diversification of the market towards non-developed countries.”

India exported $23.59 billion (over Rs1.05 trillion) worth of goods in February, the highest in a single month, up from $20.60 billion in January and $22.50 billion in December.

Between April 2010 and February, India’s exports have risen 31.4% over the same period in 2009-10, allowing India to go past its $200 billion export target for 2010-11 a month ahead of schedule.

Saugata Bhattacharya, chief economist at Axis Bank Ltd, said the rise in exports has been in line with the recovery in global growth.

“Preliminary data from overseas indicates that imports have picked up from the developed markets. And I would not be surprised if there is again a huge jump in March because exporters usually push hard in the last month of the financial year,” he said. Bhattacharya expects at least $30 billion of exports to have been traded in March, and the rupee to hover around 45 per dollar in the next three months.

Imports have been muted the past few months, resulting in a subdued trade deficit.

Trade deficit is the difference between a country’s imports and its total exports.

India’s trade deficit at the end of February was $8.1 billion, but commerce secretary Rahul Khullar has said the data is underestimated due to a technical glitch.

Official data show imports contracted 11.1% in December and grew 13.1% in January and 21.2% in February. The January and February data will be revised at the end of the fiscal, Khullar said. He explained the contraction in December imports as a “one-off”.

Jehangir Aziz, India chief economist at JP Morgan Chase and Co., said the rise in exports mirrors the strong industrial growth in India and the indicative Purchasing Managers’ Index (PMI).

“Industrial growth year-on-year has been erratic but month-on-month, the growth has been in double digits,” he said. “PMI numbers have also been strong, which has been reflecting in exports.”

Industrial production growth eased to 3.6% in November from 12.1% in October. The growth was at 2.5% in December and 3.7% in January.

The HSBC PMI posted 57.9 points in March, unchanged since February.

“Indian manufacturers reported a substantial increase in new business received during March. Moreover, the rate of new order growth accelerated to a 31-month high,” HSBC said in a report last week.

Aziz expects the rupee to move in the 44-45 per $1 band helped by strong exports and capital inflows into the local equity and debt markets.

Foreign funds invested $1.5 billion in March in India after pulling out $721 million in February and $250 million in January.

Aziz cautioned that the export data have not factored in the impact of the earthquake in Japan, the third largest economy.

“Japan produces some critical technological and electronic equipment for the world and if they are not able to produce this equipment, it could have an impact on countries like India, which produce some parts of the final product,” he said.

Source : livemint.com