Rupee appreciation helping boost imports from China

Moneylife Digital Team 10 August 2017

Economy & Nation

The Indian rupee has been appreciating since February due to a deluge of portfolio capital inflows. Since February 2017, the domestic currency has appreciated 5.5% against the US dollar and 3.7% against the Chinese Renminbi. Especially, the rupee appreciation against Renminbi has resulted in a surge in cheaper imports from China, says a research note.

Says State Bank of India (SBI) in its report, "...the appreciation of rupee against Chinese Renminbi has enabled Indian importers to purchase larger quantity of goods at lower prices. If this trend of rupee appreciation continues, thereby making goods from China cheaper, our imports from China could very well exceed the level of $61.30 billion attained in FY2017."

"However," the report says, "This in turn can adversely impact production of these domestic industries. Even the IIP data reveals that industries such as electrical equipment; motor vehicles, trailers and semi-trailers; fabricated metal products as well as chemical industries are showing negative growth in the past few months."

"This calls for some policies which support and encourage domestic industries so that they can grow, generate income and employment and reduce dependence on such frivolous imports thereby making the dream of 'Make in India' successful," SBI added.

Using a simple arithmetic of keeping the price of commodity imports from China unchanged from February levels in May, the estimated amount required to purchase those commodities shows that India has saved $3.9 billion.

According to SBI, one of the benefits of rupee appreciation is the self-fulfilling prophecy of further expectation of rupee appreciation, thus leading to possibly a large part of importers’ portfolio being unhedged.

"To estimate what could be the percentage of portfolio remaining unhedged we constructed a typical hypothetical example of Iron and Steel. Our results revealed that if rupee had not appreciated the import bill for the entire iron and steel imports over (January-June 2017) would be around $1072 million compared to the actual bill of $1133 million, $61 million less than the actual," the report says.

Unfortunately, Indian importers lack hedging of such a currency movement. As per estimates from SBI, at present a large part of the import portfolio is unhedged and based on its simulation results, this could be at least 40% on the lower side.

As of now, the report says, banks have to keep aside a provision if corporates do not hedge their portfolio. The apex bank may thus think of further suitable measures that could spur market players to hedge their portfolio, as any self-fulfilling prophecy could lead to further rupee appreciation. The apex bank could cajole market players to hedge their portfolio given that forward premia has eased significantly recently.

"While rupee appreciation does have positive consequences in terms of lower imported inflation, in times of lower oil prices, we could perhaps live with a little bit of rupee depreciation!" the report from SBI concluded.

Comments

User

Shrikant Dattatraya Sahasrabuddhe

8 years ago

You are creating opinion against strengthening of rupee.Not expected of you.Simply outrageous.

Shrikant Dattatraya Sahasrabuddhe

8 years ago

You are creating opinion against strengthening of rupee.Not expected of you.Simply outrageous.

Ramesh I

8 years ago

Even without this rupee appreciation, the Modi Govt has done precious little to curb imports from China. Their pet initiative of #MakeInIndia only remains on paper, as Indians are forced to buy Chinese products due to lack of options of Indian make. But, this massive trade deficit with China is due to several Indian governments of past 15+ years patronizing Chinese firms, which probably make generous 'donations' to politicians and parties. Long live #MakeInIndia

Bhanoji Rao

8 years ago

India needs FDI and not FPI. Intellectuals, Policy Makers, Media and Business Leaders: Please debate about this to see if there is a case for FPI (in creating jobs?)