Ask any doctor who treats chronic diabetics and he will tell you that it is not the high levels of sugar in the blood that is the real danger but the spikes and the troughs that are potential killers. On Wednesday, as the rupee dived to a new low, within touching distance of the Rs. 70 to a dollar mark, industry insiders said much the same: that it is the volatility of the currency, not merely the rupee going down, that is killing them.
Although many industries have taken cover for their foreign exchange exposure, not all have, says H.V. Harish, president, Bangalore Chamber of Industry and Commerce (BCIC). The sudden uptick of the rupee last week, resulted in some businessmen assuming that the rupee would go back to about Rs. 61 to a dollar levels, he said. “But they have come to grief because the dollar came back with a vengeance very soon,” he said. “It is the extreme nature of the uncertainty that is affecting day-to-day decisions.”
D. Muralidhar, former president of the Federation of Karnataka Chambers of Commerce and Industry (FKCCI), who runs a unit that manufactures and exports specialised ferroalloys and abrasives, says: “Calibrating prices is a hazardous task because of the volatility.” A degree of stability is necessary for pricing decisions to be taken because businessmen cannot keep changing prices on a daily basis, he said. Moreover, since he sources raw materials from several countries (for example, Brazil and China), and since their currencies have also depreciated dramatically in the last few months, it is extremely difficult to get prices right, he explains.
Waiting for stability
So, how do businessmen conduct their business in this situation? “There is nothing we can do but wait,” said Mr. Muralidhar. Recalibrating margins and prices will have to wait till the rupee “stabilises somewhat, when the day-to-day fluctuations are within a more predictable15-20 paise range.”
“The popular perception that exporters are sitting pretty is not quite right,” says an industry source. For industries such as garments, where the raw materials are sourced from within the country, the rupee’s 20 per cent slide since June has been a boon. But in exporters of manufactured products, including those such as auto ancillaries, the impact is not as positive. This is because these industries typically also import raw materials, components or equipment in order to deliver to overseas clients.
R. Shivakumar, president, FKCCI, said small industrial units that supply to multinationals find that the “fine print” in their contracts prevent them from recalibrating prices to adjust for the higher prices of imported materials. “Many small units are a victim of the contracts they entered into before the massive depreciation started since June,” he says.