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Article - Date: 31-07-2013

India's Volatile Exchange Rate Adds Extra Hurdles to Market

Cotton Guru reports on the deceptive short-term gains of currency inflation.

July 31, 2013

The global environment is much more stable today than it was in 2009 and the challenges for India's economy are mainly domestic. The situation for exporters, however, is likely to be weakened by currency volatility and higher-than-expected interest rates.

Buyers can expect a better price now, but as the rupee weakens, it likely will result in inflation and a rise in the cost of raw materials, labor, and electricity.

The Reserve Bank of India's (RBI) recent measures − capping the access of banks to systemic liquidity, and mandating a higher minimum daily cash reserve requirement − have halted the declining interest rate cycle and tightened systemic liquidity.

Even before RBI took these measures, the exchange rate was affecting exporters. Banks are asking exporters to reduce the impact of currency depreciation by remitting funds, thus adding to the liquidity problem at their end.

The Federation of Indian Exporters Organizations (FIEO) has demanded that the exchange rate be fixed by the bank at the time the loan is granted and maintained at that level despite currency volatility during the lending period.

The recent volatility has increased the need for importers and exporters to hedge their currency risks. The lack of a market for hedging after 5:00 pm, though, is proving difficult for domestic traders competing in the global market.

Thehe depreciating Indian Rupee may offer short term gains for exporters but is more likely to harm the deteriorating health of corporate India in the long run.

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