Indian Exporters Wary Of Appreciating & Volatile Rupee

But in the same way, any appreciation of the rupee squeezes the margins for exporters, especially MSMEs, which operate on wafer-thin margins. And that's exactly what happened next, as the rupee started to strengthen over the next two months, reaching Rs 83.86 to US$ 1 on May 2. 

After that, the rupee-dollar exchange rate started stabilising again to reach Rs 86.81 on June 23. Since then, it has strengthened again by more than 1.4 per cent to arrive at Rs 85.58 on July 10.

Dilip Parmar, research analyst of HDFC Securities, said, "This stability came as most Asian currencies gained against the US dollar, largely due to a 'risk-on' market mood and falling imported commodity prices. The US dollar itself depreciated against most major currencies, following President Donald Trump's indication of further trade discussions after rolling out new tariffs. Looking ahead, the spot US$/INR exchange rate is expected to remain range-bound between Rs 85.25 and Rs 86.05.”

US Dollar Weakened Due To Policy Uncertainty

The dollar has weakened mainly due to current uncertainty in domestic economic policies and regular tariff flip-flops by the US government. Trump’s “Big Beautiful Bill” has also raised concerns around rising national debt and fiscal deficit.

As a result, investors tend to shift to other currencies and assets, denting the global reputation of the US dollar as “the reserve currency of the world”. The traditional role of the US dollar as a “safe-haven” asset, thus, got diminished.

Rupee Appreciation Good For Importers, Not For Exporters

The ‘stability’ and relative strengthening of the INR vis-à-vis the US dollar have several direct and indirect effects on Indian exporters, particularly the MSMEs.

Afaq Hussain, the Director of the Bureau of Research on Industry and Economic Fundamentals (BRIEF), said, “The rupee's recovery is due to a combination of a weakening dollar, return of foreign capital, and improved trade optimism. However, in the immediate future, an appreciating rupee may result in some headaches for the Indian exporters.”

Exports get a boost when a country’s currency depreciates. Exporters get more, in terms of domestic currency, by selling the same amount of goods. China, for example, pegged its currency, the renminbi or yuan, to the US dollar between 1997 and 2005. Since then, the country has controlled its currency against a basket of international currencies, and permits only a narrow +/- 2 per cent fluctuation, mainly to boost exports.

Compared to that, India has a 'managed float' system for its currency, which implies that the RBI allows the value of the rupee in the global currency market to fluctuate, but intervenes whenever it is necessary. That's what the Apex bank did this year, through forex swaps and dollar sales.

However, from the point of view of importers, any appreciation in the rupee is desirable. Raw materials used in production, machinery and equipment are some of the essential imports of Indian industries across sectors. With an appreciated rupee, Indian importers can buy all these at lower costs. Even crude oil, which is a necessity for the economy, would come cheaper.

Appreciating Rupee Affects Export Price Competitiveness & Earnings

Indian goods and services become more expensive for foreign buyers whenever the rupee strengthens, even slightly. This is a loss in terms of export competitiveness, as competitors from countries with weaker currencies gain relatively at the cost of Indian exporters.

Rupee strengthening also results in lower revenues for exporters. For example, if an Indian textile goods exporter earns US$ 1 million in any month, its rupee revenue would be Rs 86.81 million at the exchange rate of Rs 86.81 per US dollar, as was the case on June 23.

However, at the exchange rate of Rs 85.58 per US dollar (as on July 10), the same textile exporter’s revenue would fall to Rs 85.58 million, a monthly revenue loss of Rs 1.23 million.

Saibal Ghosh, CEO of SSP Pvt Ltd — an Indian export company — said, “We reached a contract for one of our consignments early in the year, when the exchange rate was around Rs 85 to US$ 1. Our selling point was at Rs 83. We were expecting the dollar to depreciate to more than Rs 87, which it did in February. But now, the exchange rate is around Rs 85. So, there is some loss, though it's notional.” Ghosh previously served as COO at SUEZ India.

MSMEs In Gems & Jewellery May Get Affected

As noted earlier, many exporters operate on very thin profit margins. Some important export sectors in India, like textiles, pharmaceuticals, gems and jewellery, and IT services, are affected by the appreciation of the rupee. 

“Any rupee appreciation squeezes the margins for the gems and jewellery sector, which is dominated by MSMEs. If any particular MSME gems and jewellery exporter is operating on a thin profit margin, then an appreciation has the potential to threaten its survival,” said Hussain.

Similarly, for IT services, which depend on their revenues from the US and Europe, the strengthening of the rupee aggravates their balance sheets. While textile exporters lose part of their price competitiveness, for pharma companies, it means lower export earnings.

Will Indian Exporters Cut Costs Or Diversify Products?

If the trend of rupee appreciation and volatility continues, exporters may resort to cost-cutting. Another alternative is to improve productivity. However, that would require government policy incentives for improved production technologies, particularly for the MSMEs.

Hussain stated, “Product diversification is another way for Indian exporters to tackle rupee appreciation. Moving up the value chain always gives better profit margins. Exporters can also explore and reach new export markets, but that takes time.”

Hedging currency fluctuation risks by investing in financial instruments may be another option, but that's not what many exporters can afford, as currency hedging is a specialised skill.

Ghosh said, “For policymakers, slight appreciation of the rupee is good signalling. The same goes for importers of raw materials, machinery and equipment. However, some exporters, if not all, feel the pinch when the rupee appreciates.”