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Switching to dual exchange mechanism |
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Dr. R. K. Dhawan Chairman, FIEO, Northern Region |
Appreciation of Rupee by over 9% during the last nine months has severely affected exports and has eroded the profitability of exporters. And if immediate measures are not taken to mitigate its impact on exports, then the ambitious target of 160 billion dollars set by the Commerce Minister for the current fiscal may prove a pipe-dream. But can the government afford to devalue the Rupee for reaching its export target? Well, not in the current scenario with high inflation when it needs imports and has sufficient forex reserves to feel panicky about future export targets.
There is a way out, though. The government may adopt dual exchange rate - pegged and floating. The fixed rate of exchange may be applied to exports and can be fixed at say about Rs. 45 to a Dollar while floating exchange rate may be applied to imports. Alternatively, a mechanism may be brought in place where say about forty percent of the exports proceeds is converted at fixed exchange rate while the balance sixty percent is converted at floating exchange rate. A similar mechanism was adopted when a few yeas ago the country switched over from an official to a free floating rate of exchange. During that time, conversion of foreign currency was allowed at two different rates - 60% at floating rate while 40% at official fixed rate of exchange. This had helped exporters in the wake of withdrawal of Cash Compensatory Support and Replenishment License scheme.
The fixed exchange rate would provide some security to the exporters, who, instead of resorting to risk covering instruments like hedging, would be able to concentrate on their marketing efforts. This will also check their tendency to switch to domestic marketing. According to some trade analysts, a strong tendency is being noticed in the recent period among the exporters to invest in booming domestic retail sector.
The pegged exchange rate may also serve as a deterrent against non-essential imports and will help reduce our widening trade deficit which has already crossed US$ 50 billion. Moreover, this may also help many Indian BPO service providers to recover their businesses lost out to China and other countries in view of appreciating Rupee. Adopting dual exchange rate mechanism, at least as a short term measure, would be just be fitting in the current economic context.
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Credit Policy disappoints FIEO FIEO President Mr. Ganesh Kumar Gupta has expressed disappointment over the lack of initiative by the RBI to address the concerns of exporters over appreciating Rupee. With dollar hitting a nine year low against rupee, says Mr. Gupta, exporters were expecting some relief from the Central Bank in its Annual Policy Statement for the year 2007-08 announced on 24th April. According to him, exporters, especially the small and medium ones, are not exposed to risk covering instruments nor can they afford to engage prohibitive professionals to manage such risks. FIEO Chief informed that the Reserve Bank had announced in a recent circular that the rupee export credit rate effective from May 1, 2007 would not exceed BPLR by 2.5% per annum, but the current hike in the repo rates had resulted in an increase in the BPLR by 3 to 4 %. He said, it has increased the cost of credit for the export sector substantially which is already reeling under appreciating rupee and huge transaction cost. The new RBI Policy lays emphasis on containing inflation. It announces measures such as enhancement of overseas investment limit to 300% of networth (from the existing 200% of networth); increase in current or capital account transactions for individuals from US $ 50,000 to US $ 1,00,000 per financial year in the liberalized remittance scheme; permitting small and medium enterprises (SMEs) to book forward contracts without underlying exposures or past records of exports and imports through Authorised Dealers with whom the SMEs have credit facilities etc. |
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Meeting on Multi-Commodity Exchange at Kolkata
The Eastern Region office of FIEO organized a meeting on 23rd March at Kolkata to inform the exporters dealing in commodities about the facilities offered by Multi-Commodity Exchange (MCX).
FIEO Managing Committee Member Mr. Pravin Saraf chaired the meeting and gave an overview of the functions of MCX. He advised the exporters to keep themselves abreast with the developments taking place in commodity exchanges.
Participating exporters raised many issues they faced with commodity exchanges like hefty membership fees and specific difficulties faced in the case of lentil and potato. |
