Exporters fear rupee rise due to foreign fund flow
New Delhi | Sunday, Nov 22 2009 IST
 

After industry chamber Assocham feared weakening of India's export competitiveness through rupee appreciation and inflation, exporters body FIEO too has expressed concern over depreciation of the US dollar, saying it would affect Indian exporters' competitiveness in overseas markets.

Federation of Indian Export Organisations president A Sakthivel said they do not expect any rise in interest rates in the United States in the coming 12 to 18 months to stimulate rebound in its economy. This, he added, therefore, could lead to massive dollar inflows into emerging markets like India, strenghren the domestic currency and thus weaken its export edge in several areas. Assocham too has raised red flag over excessive flow of foreign funds into the Indian capital market and feared weakening of India's export competitiveness through rupee appreciation and inflation. It urged government to slap a 2 per cent tax on foreign institutional Investment (FII) to regulate its flow.

Portfolio investors have pumped in over 15 billion dollar in the countrys equities market so far this year.

Finance Minister Pranab Mukherjee has, however, said there is no cause for concern over FII inflows. The government, he added, would continue to monitor the flow of funds and act if there is any distortion. Stating that while the lower interest rates may help the US economy, the FIEO chief said record purchase of 15.77 billion dollar worth of Indian stocks by foreign funds year has resulted in appreciation of the rupee by 4.8 per cent. The rupee, he added, could to around 44 to a dollar creating difficulties for exports by micro, small and medium enterprises (MSME) faced with a price-sensitive recession-hit global market. Pointing out that Brazil and Taiwan have imposed capital controls on such inflows in their equity markets, Mr Sakthiwal, however, did not seek any explicit curbs on them. But Asscham demanded two per cent tax on such inflows to correct imbalances in its equity market without inviting any criticism.

This, the business chamber, said is necessary to prevent a repeat of 2008 when India witnessed a flight of FII in the wake of financial meltdown in United States and other major economies of the world.

The 2 per cent tax on FIIs should continue untill stimulus packages are withdrawn in develped economies and interest rates hiked to above zero per cent level, Assocham suggested.

Expressing concern over excessive foreign inflows into Indian equities, the apex chamber said without a moderate deterrent of 2 per cent tax on such inflows, Indian capital markets could overstretch, inflate rupee and create asset bubble. This will not only weaken export competitiveness but also fuel inflation, it added. Assocham attributed record flow of foreign funds into the country's capital market to portfolio investors raising money at zero interest in major economies and parking the funds in Indian stocks. The apex chamber cautioned if the government did not act to check FIIs flow, appreciation of rupee and rise in inflation would erode competitiveness of the Indian exports.

The benchmark BSE index gained 173 points from last week's close to end with a gain of 1 per cent at 17,022 over the weekend. Nifty, the broader stock market index, also surged 1 per cent to 5,052.

Analysts said foreign investments played a crucial role in the Sensex's movement last week. Indias exports for October stood at 12.5 billion dollar, down 11.4 per cent from 14.1 billion dollar in the same month last year.

Exports had declined 13.8 per cent in September. Governemnt data revealed that merchandise exports, which were falling by over 35 per cent during April-May, had been steadily rising since June.

Total exports during the April-October period stood at 90.4 billion dollar, down 26.5 per cent from 123 billion dollar in the corresponding period of 2008-09, data released by the Ministry of Commerce and Industry showed.

Both government and industry expect month-on-month export figures to turn positive from January, but not overall. Hence the government is not thinking of withdrawing sops at this stage, though it is worried over the projected 6.8 per cent fiscal deficit in the current financial year.

-- (UNI) -- 22DI10.xml

 

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