Saturday, July 28, 2007

Bailout is for wimps

While the impact of Rupee appreciation is always arguable, the desirability and effectiveness of RBI intervention has become a moot point of debate.

The stronger Rupee buys more for less. Is that not an advantage? The inflation has come down from 6.7% (Jan 07) to 4.3% now. It is welcomed by bulk importers, acquirers of global companies and travelers. Those who raised forex loans earlier and are repaying now are delighted as less Rupees repay more dollars. Forego the advantage? We are net importers and it benefits the whole nation to have a stronger Rupee and that's preferable any day to a few IT exporters benefiting from weaker Rupee. The ones that worry are the Exporters of services including IT, textiles, processed food etc., the tribe which made a killing earlier when Rupee was the dog. They've had enough rain. Now let others soak it up.

Others argue that in India the correlation between stronger Rupee does not necessarily mean lower inflation. Our three principal imports are Crude, gems and jewellery and capital goods. While crude prices are administered, others don’t feature in inflation index. But crude prices were administered even while our Rupee was weaker and $/barrel was high. The administered pricing enabled us to pay less per litre of petrol - didn't it ? That's two-way street and it blunts the argument.

Look at those who clamor. They are the ones who get least hit - IT fellows that have 20% plus margin. They sit on huge cash cushions (built out of the earlier weaker Rupee days) in the balance sheet, have access to and can afford premium hedging tools like forward cover, currency swap etc., besides natural hedges presented by a multi-currency revenue streams from wider geographical distribution of businesses. Contrast them with some 65% of exporters that come from SME segment - that export at margins of 5-10%. Even a minor rise in Rupee wipes their entire profits out. But it’s the IT that clamors more.
Frankly the question is not whether RBI should intervene. Ask "how effective will that intervention be" and "to whose benefit" in an increasingly flat world where volatility is the new atmosphere. Wake up and be nimble. Adjust swiftly to currency fluctuations. Asking for bail outs is for wimps.

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