Strong rupee makes India trillion dollar economy (News Feature)

By Rohit Karir Apr 26, 2007, 11:39 GMT

New Delhi - The investment firm Credit Suisse said Thursday that India has become a 1 trillion dollar economy, but with the Indian rupee hitting a new high against the US dollar, exporters expect relatively slow growth in fiscal 2007-08.

When 158 exporters across the country were recently polled by The Financial Express business daily and the Federation of Indian Export Organisations (FIEO), 77 per cent said that they expected the country's exports to grow by less than 15 per cent in fiscal 2007-08.

Seventy-one per cent of the exporters, surveyed in the poll conducted in March-April also said that the exchange rate should be pegged at 44 rupees to the dollar for exports to grow at 15-20 per cent rate in the current fiscal year.

'The rupee appreciation has started taking its toll on exports. After growing by about 24 per cent in April-November 2006, export growth has slipped to single digit,' said Ganesh K Gupta, president of FIEO, a leading institution for promoting global trade set up jointly by the government and the private sector.

Gupta said exporters are shying away from entering into new contracts and are increasingly looking at the booming retail sector to invest.

Credit Suisse bank, amidst fears of weak export performance, said on Thursday: 'Indian GDP at the current price level is a 1 trillion dollar economy. With the rupee appreciating to below 41 against the US dollar, yesterday was the first day for the economy to be a trillion dollar economy. It's the 12th country to reach this milestone.'

But the global rating agency Moody's on Thursday pointed out that there are signs of over-heating in the economy like higher-than-acceptable inflation, still-high rates of domestic credit growth and the rapid rupee appreciation mainly driven by strong capital account inflows.

FIEO, which was hoping the government's monetary and credit policy for 2007-08, announced on Tuesday, would encourage more fund outflows as a way to ease pressure on the currency to rise, found that the new policy made the rupee strengthen even further.

The Indian rupee strengthened to 40.90 rupees per dollar for the first time in nine years on Wednesday, with rising capital inflows and Reserve Bank of India's (RBI's) recently announced progressive credit and monetary policy for 2007-08.

The rupee rallied further against the dollar on Thursday and was quoted at 40.7 in late morning deals following sustained foreign fund inflows amid no intervention of the central bank to cap rupee's upsurge.

The rupee's previous strongest position was in May 1998 when it traded 40.91 to a dollar. In intra-day trading on Wednesday the rupee rose to 40.85.

The rupee is up 8.2 per cent this year. The Thai baht is the next best Asian performer with a growth of about 3.8 per cent.

The rupee performance could have a bearing on the export forecast of 150 billion dollars in 2007-08 - up from 125 billion dollars in 2006-07 - as enumerated by Minister of Commerce and Industry Kamal Nath when he unveiled the Foreign Trade and Policy Procedure 2007-2009 on April 19.

'RBI is not intervening in the forex market strongly enough despite buying 20-30 billion dollars since January to control the rising rupee. If it continues to firm up then exporters will be hurt even more,' Ashish Pandey, financial consultant at ABN AMRO bank told Deutsche Presse-Agentur dpa.

RBI, since January, has increased lending rates and cash reserve ratio (the mandatory amount of money a bank has to maintain with the RBI) twice to reign in inflation and consumer lending, which has affected export performance.

Y V Reddy, governor of the RBI, has down-played concerns of exporters. 'The RBI has been successful in managing the rupee exchange rate, which has helped in sustaining high growth and controlling inflation.'

Reddy said that an exchange rate is 'market determined,' adding that if the rupee continues to appreciate it will lead to cheaper imports and an increase in demand, thereby pushing up inflation.

On the other hand, a depreciating rupee would lead to higher capital inflows, posing a challenge to liquidity management, which also impacts inflation.

'Going by the economic growth rate of 8.5 per cent and average inflation at 5 per cent, current account deficit less than 2 per cent, despite oil and food shock over the last four years, I would say we have done our balancing act very successfully,' Reddy said.

Indian corporates too are facing the heat. Srinivas Vadlamani, chief financial officer of Satyam, a leading Indian IT company which exports software solutions, said, 'If the rupee, already at 41 rupees to a dollar, slides further down then definitely it will have an impact on our future earnings.'