Rupee Volatility, not Global Currency wars, Impacts Exports most: Economists.

NEW DELHI: The international community is waking up to the threat of warfare, with some large economies trying to strengthen the faltering economic recovery by managing their currencies in a bid to increase exports.

“We are in the midst of an international currency war,” Brazilian finance minister Guido Mantega said on Monday while addressing an industry meet in Sao Paolo, Brazil.

“This threatens us because it takes away our competitiveness,” he said pointing to the forex market interventions by industrialised nations.

is already locked in a bitter dispute over the value of its currency Renminbi while Japan has recently started intervening in the forex market.

“As policymakers fret over limited availability and effectiveness of tools, the nervousness is palpable in the foreign exchange markets, where there has been an unmistakable veering towards beggar thy neighbour policies,” UBS Investment Research said in a research note. Could the recent rupee appreciation be a part of the same piece.

“We are witnessing the process of global rebalancing...the developed economies are looking towards the emerging economies as markets for their goods and services,” said , chief economist at private sector lender HDFC Bank .

India’s exporters are certainly a worried lot. “The appreciation is really hurting us,” says SP Aggarwal, president of Delhi Exporters Association.

The rupee has rallied sharply in the last month from 47.08 to 45.11 against the dollar due to heavy capital flows. Foreign institutional investors (FIIs) have bought equity and debt worth over $10 billion in the last two months.

Indian economists, however, do not see any cause for concern in the recent rupee rally. “Real appreciation in the rupee has not been as high as its competitor economies,” said Sonal Varma, vice-president and economist at suggesting that India’s was not in the same boat as Brazil.

Over the last five years, the rupee has been highly volatile, trading between Rs 38 and Rs 52 against the dollar, perhaps reflecting the relatively small size of the market, but there is no clear trend of appreciation.

Meanwhile, structural improvements have allowed exports to grow at a fast pace. “Exchange rate is not the main driver for exports in India, rather its productivity, efficiency gains and global demand,” said Jahangir Aziz, chief economist at JP Morgan. However, the short-term volatility is unnerving for exporters.

“It is difficult for exporters to book orders when there is volatility in the exchange rates, as price quotations cannot be given with certainty,” says Aggarwal.

A large segment of exporters are small and medium industries that they do not have access to sophisticated risk management tools to mitigate currency risk.

The main issue in the case of India, therefore, could be the managing of the volatile rupee. No wonder Barua feels that further appreciation in the rupee could invite intervention.

“The rupee may encounter resistance around the 44.50-44.80 levels...if the rupee dropped below this there is a possibility of RBI intervening in a big way,” he said.

Source : economictimes.indiatimes.com