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India pops the
champagne
By Indrajit Basu
KOLKATA - Though the immediate impact of
the small yuan revaluation will be minimal on
India, it throws up several interesting
possibilities for the country's economy. For one,
the move is expected to provide more room to the
central bank, the Reserve Bank of India (RBI), to
allow the rupee to appreciate, and two, since the
revaluation is expected to cool overheated oil
prices, the RBI is hoping that the new yuan level
will help in keeping India's interest rates and
inflation down.
Expectations of interest
rate hikes were driven primarily by the fear of a
rising inflation rate, caused mostly by rising oil
prices.
Even as the rupee soared to a
six-year high to close at 43.25 to the dollar
within an hour of the announcement of the yuan
revaluation on Thursday, Indian exporters are
popping their bubbly as the move will mean higher
prices for Chinese exports, and thus more volumes
for Indian ones. Over the past few years, while
Indian exporters have been fighting hard to break
into global markets for low-cost and
labor-intensive manufactured products, they kept
losing out to China, due to the major disadvantage
of a rising rupee against the dollar as the yuan
was kept artificially weak. This meant that to
stay competitive, Indian exporters had to steadily
squeeze their margins.
According to
Research and Information System for Developing
Countries (RIS), an India-based think-tank on
global issues, since most of the Asian currencies
have in the past few months appreciated much
higher then the yuan (the rupee has appreciated by
over 10%), it could be safely expected that the
"natural" exchange rate of the yuan is much higher
than the present valuation. RIS believes that even
if the currency float is managed and violent
movements are restricted - since China's central
bank has restricted the daily movement within 0.3%
- gradually the yuan will tend to move toward the
natural exchange rate.
In fact, Indian
exports have already started gaining. US
retailers, including Wal-Mart Stores Inc, Gap Inc
and Chico's FAS Inc had of late started increasing
purchases of inexpensive clothing and jewelry from
India in anticipation of rising costs that would
result when China, their biggest offshore
supplier, revalued its currency.
Quoting
Ken Mark, managing director of the Martello Group
in London, Ontario, Bloomberg reported that
retailers who bought about $65 billion in Chinese
goods last year were turning to India because the
anticipated yuan revaluation might increase their
costs by 10% over two years. Currently, Wal-Mart
sources goods worth $2 billion - including
indirect sourcing - a year from India, while its
procurement from China exceeds $18 billion each
year, out of which direct sourcing is about $9
billion.
Yet another direct gainer is
expected to be the Indian stock market - or
inflows from foreign institutional investors
(FIIs) to be precise - which, incidentally, would
also help ease the country's rising interest
rates. According to Andrew Holland, vice president
of DSP Merrill Lynch, "Not only India, this will
also have a positive impact on the whole of Asia's
equities and commodities." Indian brokers say the
Chinese equity markets have always been
underperformers and never on the radar of regional
portfolio managers, largely due to the opaqueness
of China's financial markets and the banking
system. The trend in the recent past: any
disincentive to invest in China has directly
benefited Indian markets. Therefore, the
revaluation could redirect at least some of the
FII money meant for China to India.
But
there's a flip side as well. The revaluation
threatens to increase the input prices of some of
the industrial sectors in the country. According
to the Federation of Indian Export Organizations
(FIEO) that was set up jointly by the Ministry of
Commerce and private industry, a lot of Indian
exporters are actually re-exporters of products
bought from China. "These include textile, toys,
plastic molded products, furniture and retail
consumer products, which are growing at a rapid
pace in the Indo-Chinese trade. The prices of
these items will go up, leading to changes in the
profit margins," said the FIEO. Some also feel
that an appreciating yuan will spur local metal
producers, like steel and aluminum - some of the
products for which China has a voracious appetite
- to ship even more of it to the Middle Kingdom.
This could put pressure on input prices of the
local user industries of these commodities.
Nevertheless, the Chinese central bank can
look forward to receiving at least a bit from
India in return for all that it has given through
the revaluation. Reports suggest that the RBI is
offloading a significant portion of its US dollar
reserves in favor of other Asian currencies,
including the yuan. India's central bank has
always considered the yuan an "exotic currency"
with little liquidity and limited dealing in
global currency markets. But the revaluation and
the prospect of its gaining against the dollar now
give the RBI an impetus to increase its stock of
yuan, say experts.
Indrajit Basu
is a Kolkata-based
equity-analyst-turned-journalist with more than 12
years of experience in business/finance and
technology journalism. Besides writing for Asia
Times Online, he also writes for US-based
publications, as well as IT companies.
(Copyright 2005 Asia Times Online Ltd.
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