In response to the ever rising Indian Rupee
The partially convertible Indian rupee is perhaps the best performing Asian currency at present. It has consistently been appreciating against the US dollar in recent times. The foreign exchange market is highly volatile. The RBI, after regularly intervening in the market for some time, subsequently decided to try a hands-off approach and let the rupee find its market bearings. The Governor of the RBI has said in so many words after announcing the central bank’s policy last month that “The liberalization of outflows is part of the gradual liberalization of the capital account—partly preparing the domestic industry to handle the currency fluctuations better.” - Rupee/Dollar exchange
Current account transactions are already fully convertible. Capital account convertibility continues to be a desirable objective for all investment and business-related transactions, and it is widely expected that the country will move towards a fuller float for the rupee in the course of the next three to four years. The foreign exchange reserves position is comfortable, at about $204 billion, and continues to get stronger.
Three general views have widely been held in India with regard to the framing of appropriate policies relating to forex markets. These are as follows:
i) Exchange rates should be flexible and not kept pegged.
ii) Minimal intervention should be permitted to manage exchange rates to a limited extent if it is perceived that the volatile market may have a destabilizing effect in the short run.
iii) Sufficient reserves should be maintained to take care of fluctuations in capital flows.
The RBI has been periodically but selectively intervening in the market to douse the flames of excessive volatility. Such interventions by the RBI are well-informed and thought-out decisions made in the light of overall economic realities and the central bank’s assessment of conditions in such varied components of the economy as the money market (including the call money market), debt and securities markets and stock exchanges, apart from inflation levels. Obviously, the focus of the RBI is less likely to be on aspects like volatility and its impact.
Full convertibility, and the volatility inherent in the transition, is the face of the future. We should learn to live with this
It is also true that there are constraints on the ability of the RBI to intervene in the market indefinitely. There has to be a point at which even the regulator has to step aside and allow the market to play its corrective role. When the rupee is made fully convertible, volatility is likely to be reflected in the short term as well as in the medium term (of, say, two-five years). But once the economy learns to absorb these shocks, stability will prevail in the long run. In the intervening period, the RBI is expected to play the role of the baby walker to help the economy take its first steps towards the stated objective of full convertibility and help participants get accustomed to rates as determined by the market. During this process, all should have implicit faith in the RBI’s guidance.
What are the consequences of the rupee appreciating against the dollar? It may not necessarily adversely hit Indian exports immediately. For a while, Indian exporters may depend on the purchasing power of their customers, especially in the case traditional exports like textiles, tea and leather goods. But over a period of time, the rupee’s continuous appreciation may upset their applecart, with their customers turning to cheaper sources. Exporters will be able to continue in business only by matching global levels of quality and pricing, or through unique value additions.
Some export sectors may be very sensitive to exchange rate fluctuations, since their profits mainly depend on such rate fluctuations. Some other export sectors may be less sensitive, and will be able to adjust to the changes.
Full convertibility, and the volatility inherent in the transition, is the face of the future. The Indian forex-using community should learn to live with this market reality. For now, an appreciating rupee will see a fall in exporters’ profits. In a scenario of a depreciating rupee, exporters were enjoying the gains of opportunity profits. Forex profit opportunities rupee/shekel.
Exporters will simply have to acclimatise themselves to the changing market environment, and turn competitive in foreign markets in a much broader sense of the term. This may involve renewed market focus and value re-engineering as much as new methods of cost control, aided hopefully by infrastructural enablers and other efficiency drivers. Exporters cannot continue to expect the RBI to actively engage in currency management forever. It will be better for them to hedge their forex risk and concentrate on what it takes to achieve normal business profit.
Traditional hedging instruments like forward contracts and new-fangled instruments like derivatives will come in handy for exporters as well as importers to hedge their forex risk.
Current account transactions are already fully convertible. Capital account convertibility continues to be a desirable objective for all investment and business-related transactions, and it is widely expected that the country will move towards a fuller float for the rupee in the course of the next three to four years. The foreign exchange reserves position is comfortable, at about $204 billion, and continues to get stronger.
Three general views have widely been held in India with regard to the framing of appropriate policies relating to forex markets. These are as follows:
i) Exchange rates should be flexible and not kept pegged.
ii) Minimal intervention should be permitted to manage exchange rates to a limited extent if it is perceived that the volatile market may have a destabilizing effect in the short run.
iii) Sufficient reserves should be maintained to take care of fluctuations in capital flows.
The RBI has been periodically but selectively intervening in the market to douse the flames of excessive volatility. Such interventions by the RBI are well-informed and thought-out decisions made in the light of overall economic realities and the central bank’s assessment of conditions in such varied components of the economy as the money market (including the call money market), debt and securities markets and stock exchanges, apart from inflation levels. Obviously, the focus of the RBI is less likely to be on aspects like volatility and its impact.
Full convertibility, and the volatility inherent in the transition, is the face of the future. We should learn to live with this
It is also true that there are constraints on the ability of the RBI to intervene in the market indefinitely. There has to be a point at which even the regulator has to step aside and allow the market to play its corrective role. When the rupee is made fully convertible, volatility is likely to be reflected in the short term as well as in the medium term (of, say, two-five years). But once the economy learns to absorb these shocks, stability will prevail in the long run. In the intervening period, the RBI is expected to play the role of the baby walker to help the economy take its first steps towards the stated objective of full convertibility and help participants get accustomed to rates as determined by the market. During this process, all should have implicit faith in the RBI’s guidance.
What are the consequences of the rupee appreciating against the dollar? It may not necessarily adversely hit Indian exports immediately. For a while, Indian exporters may depend on the purchasing power of their customers, especially in the case traditional exports like textiles, tea and leather goods. But over a period of time, the rupee’s continuous appreciation may upset their applecart, with their customers turning to cheaper sources. Exporters will be able to continue in business only by matching global levels of quality and pricing, or through unique value additions.
Some export sectors may be very sensitive to exchange rate fluctuations, since their profits mainly depend on such rate fluctuations. Some other export sectors may be less sensitive, and will be able to adjust to the changes.
Full convertibility, and the volatility inherent in the transition, is the face of the future. The Indian forex-using community should learn to live with this market reality. For now, an appreciating rupee will see a fall in exporters’ profits. In a scenario of a depreciating rupee, exporters were enjoying the gains of opportunity profits. Forex profit opportunities rupee/shekel.
Exporters will simply have to acclimatise themselves to the changing market environment, and turn competitive in foreign markets in a much broader sense of the term. This may involve renewed market focus and value re-engineering as much as new methods of cost control, aided hopefully by infrastructural enablers and other efficiency drivers. Exporters cannot continue to expect the RBI to actively engage in currency management forever. It will be better for them to hedge their forex risk and concentrate on what it takes to achieve normal business profit.
Traditional hedging instruments like forward contracts and new-fangled instruments like derivatives will come in handy for exporters as well as importers to hedge their forex risk.
Labels: dollar, exhange rate, finance, forex, india, indian, israel, money, rupee, united states, us
posted by Howard at
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