India's rupee is showing new muscle as it scales nine-year highs against the US dollar, alarming exporters who sell most of their goods to the US.
India's Federation of Indian Export Organizations says the appreciation of the rupee has "severely eroded the profitability of exporters."
The partially convertible rupee has risen by around 11 percent against the US dollar since last July, helped by inflows from investors eager to invest in India's booming economy.
"Its appreciation reflects the underlying strength of the Indian economy and, of course, [broad-based] dollar weakness," said Deepak Lalwani, director at London-based Astaire Securities.
But until lately, dealers say, the central bank had been intervening by selling rupees to make sure the Indian currency does not rise too quickly, and to keep a lid on export prices.
Now though, market players say, the Reserve Bank of India (RBI) has eased off from intervention as it seeks to wrestle down inflation in Asia's fourth-largest economy, which is growing by around 9 percent.
"The bank has its eye firmly on [capping] inflation," said DK Joshi, principal economist at Indian credit rating agency CRISIL.
Letting the rupee rise has made imports less expensive, cushioning the impact of strong fuel prices for India, which relies heavily on imported oil which is priced in US dollars.
By not selling rupees to buy US dollars, the bank also has not added to rampant money supply growth which has been helping fuel inflation.
After dipping briefly this month, Indian inflation crossed six percent again last Friday to hit 6.09 percent, despite a slew of monetary tightening measures.
Inflation is now more than half a point above the central Reserve Bank's ceiling of 5.5 percent.
Economists expect the rupee's firmness to continue at least as long as inflation remains above target.
"We expect the rupee to benefit from both rising interest rates and the shift in policy focus of the RBI solely toward inflation control," said Goldman Sachs in a research note.
The rupee's strength is a novel experience for Indians more accustomed to a currency that a few years ago only seemed to lose ground.
"Until about three or four years ago, on average you would factor in about a 5 percent annual deprecation," Lalwani said.
The rupee finished the day on Friday at 41.99 to the US dollar. It has notched up most of its gains since the beginning of last month, when figures show the RBI was intervening less in the market.
In 2002, one US dollar bought over 49 rupees. Now economists are eyeing a 12-month target of around 41 rupees to the greenback.
The rupee has been gathering strength as the world started talking about India as an emerging economic powerhouse.
Now India is sitting on more than US$200 billion in foreign reserves.
The sum is a far cry from 16 years ago, when reserves were down to just US$975 million, and India had to pledge part of its gold reserves as collateral and promise to free up its economy to access funds from world lending bodies to avoid default.
Foreign direct investment nearly tripled in the past financial year to US$16 billion from US$5.5 billion a year earlier, and that isn't counting the billions of dollars which flowed into the share market.
But the rupee's rise is hurting exporters.
"We will have a discussion with the exporters to find a way out of it," Commerce Minister Kamal Nath said last week, warning that the stronger currency could have "a serious impact" on the country's balance of payments.
Despite the stronger currency, the government forecast a 28 percent rise in merchandise exports to US$160 billion in the financial year that ends next March, and said the target would have been higher if the rupee had been weaker.
The red-hot outsourcing business, which earns most of its profits in US dollars, has especially been feeling the pinch after getting used to fat earnings margins. The sector now is having to look at new ways to be competitive to offset the rupee's gains.
While the four top IT service providers, whose annual turnover crossed the US$10 billion mark this financial year, have been upbeat about prospects, analysts say rupee gains could reduce margins by about 150 basis points.
The currency's outlook is "a major factor in the forward growth of these companies," said Harit Shah, analyst at Mumbai's Angel Broking.
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