Rupee weakens further to past 48 per dollar

MUMBAI: The Indian rupee weakened past 48 per dollar on Tuesday for the first time since January 2003 as concerns intensified about foreign fund outflows amid a global financial crisis.

At 9:03 a.m. (0333 GMT), the partially convertible rupee was at 48.01/48.02 per dollar, after falling 1.5 percent on Monday to 47.80/81.

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Rupee off 5-year low, but outflows weigh

MUMBAI: The rupee bounced off five-year lows on Wednesday after state-run banks sold dollars heavily, but concerns about capital outflows weighed on the Indian unit.

By 10:35 a.m. (0505 GMT), the partially convertible rupee was at 47.012/13 per dollar after falling to 47.2350 in opening deals, its weakest since June 2, 2003 and down 0.6 percent from the previous close of 46.95/96.

At the low, the rupee had lost 16.6 percent in 2008 making it among the worst performing Asian currencies. In 2007, the rupee had gained more than 12 percent.

"Companies, refiners, foreigners are all buying dollars," said a senior dealer at a foreign bank, who expected the rupee to trade in a broad 46.90-47.20 band on Wednesday.

He said the state-run banks, which usually act on behalf of the central bank, were the only ones selling dollars.

The central bank is watching the foreign exchange market as usual, Shyamala Gopinath, deputy governor at the Reserve Bank of India said on Wednesday.

Traders said heavy withdrawals by foreign funds from Indian shares had put pressure on the rupee, and the outlook remained grim with the spreading global financial crisis.

Foreigners have sold a net $9.3 billion of Indian shares so far in 2008, after buying a record $17.4 billion last year.

Data on Tuesday showed India's current account deficit widened sharply to $10.72 billion in the June quarter from $1.04 billion three months earlier as a sharp rise in oil prices widened the trade gap.

One-month non-deliverable forwards were at 47.23/47.33 per dollar, weaker than the onshore rate.

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Currency chaos hits importers, exporters alike

NEW DELHI: The steady depreciation of the rupee against the dollar and the unpredictable cross-currency movements in the global market have put India’s exporters and importers in a fix. While small and medium-size exporters who had not hedged their risks when the rupee was rising last year are reaping windfalls of the dollar breaching Rs 47, uncertainty about the future exchange rate is affecting their pricing decisions.

In the present situation, large and medium-sized exporters who had hedged their risks are clearly the losers. Most importers, who had not hedged their risks assuming that last year’s appreciation in the value of the rupee was here to stay, are also paying for the mistake.

With the export sops announced last year including an increase in the drawback rate and an interest rate subvention of 4% being withdrawn on October 1, exporters lament that the incentives are being removed much before they can actually reap the benefits of dollar appreciation. Industry executives met RBI governor D Subbarao on Tuesday, proposing that measures be taken in the upcoming monetary policy to increase money supply and ease the present credit squeeze.

Delhi Exporters Association president SP Agarwal told that when the dollar had fallen to Rs 39 last year and the government and many experts were predicting a further fall to Rs 33-34, a number of exporters had done forward booking at Rs 39.

“They are the ones who are suffering. FIEO director general said that at least half the country’s exporters had hedged their risks last year.

From the consumer’s point of view, precious metals like gold and silver are becoming dearer due to the weaker rupee. Since demand is going up during the festival season, the rupee depreciation has come at the wrong time. Diamond jewellery would also cost more since precious stones as well as gold are imported, trade sources said.

Edible oil is another item which would turn dearer due to depreciating rupee, as the bulk of the domestic demand is met through imports. In this case too, demand is increasing now due to the onset of the festival season.

Fertilisers, project imports and electronics would also turn dearer, trade sources said. For ultra-mega power projects, Indian companies are importing equipment worth billions of rupees.

Prompted by similar expectations of the dollar depreciating further, importers had refrained from hedging. As a result, despite international prices of oil and cereal decreasing, it is not percolating down to the Indian consumer because of the depreciating rupee, Mr Sahai said.

The sudden turnaround in the value of the dollar which has appreciated by approximately 18% in the last two quarters also has exporters confused over what price to quote for their future orders. There is a time lag of about five-six months between order booking, delivery of goods and the receipt of payment.

Mr Agarwal said that while many exporters were booking orders on the basis of dollar valued at Rs 44-45, they had their fingers firmly crossed. “We are just hoping that when we realise the payment for our orders in the summer, the dollar should not have fallen below Rs 44,” Mr Agarwal said.

While small exporters are rejoicing, the situation is becoming tougher for large IT companies which have substantial earnings in foreign currency. Though many of them have hedged, the extent of fluctuation is far higher than anticipated.

Interestingly, some exporters who want to play it safe and have an understanding with buyers, are quoting in Indian rupees. “When exporters quote in rupees, they are not affected at all by the value of the dollar,” Mr Sahai said. Some others are quoting in stable currencies depending on the region where they are trading, he added.

However, this too has its risks, as cross-currency movements are unpredictable, Mr Sahai pointed out. “While the dollar is appreciating against the Indian rupee, it is depreciating against the euro. Cross-currency movement is giving a complex picture,” he said.

Exporters claim that since they are yet to get over the losses suffered last year due to the more-than 12% depreciation in the value of the dollar, it was too early for the government to take back the sops. “When the dollar was depreciating, it took the government six months to react. But now that the situation has reversed, it is in a hurry to take them back,” Mr Agarwal said.

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Engineering goods exporters eye ASEAN market KOLKATA: On the heels of an economic crisis getting intensified in the US and Europe, Indian engineering

KOLKATA: On the heels of an economic crisis getting intensified in the US and Europe, Indian engineering goods exporters are looking towards the A sean for driving up exports from the country.

The exporters' body is especially counting on the potential of expanding trade with the region since it accounts for nearly 30% of India's engineering goods exports.

Countries like Malaysia, Indonesia and Singapore in particular hold immense potential. Currently, the ASEAN trade bloc is the third-largest market in Indian engineering goods, behind the US and Europe.

Engineering goods exporters are more upbeat about growth prospects in the ASEAN after holding the India Engineering Export Exhibition (Indee) recently in the Malaysian capital, Kuala Lumpur.

At Indee, which was organised by EEPC India, in collaboration with the federal government of Malaysia and leading chambers, Indian compnies received export orders worth nearly $ 0.20 million and trade enquiries worth $5 million.

In course of buyers and sellers meets at Indee, two Malaysian companies evinced interest in entering into joint ventures with Indian companies for manufacturing mechanical seals and solar panels.

EEPC India chairman Rakesh Shah said with talks going on between the countries for signing the Comprehensive Economic Cooperation Agreement (CECA), Kuala Lumpur has been chosen the first venue for export promotion among the ASEAN countries.

Besides the prposed CECA, trade between India and Malaysia is expected to get a boost in the wake of India signing a free trade agreement with the ASEAN trade bloc. Bilateral trade between India and Malaysia has grown 41% to $4.14 billion during January-June 2008.

Exports of Indian engineering goods to Malaysia increased 106% to $747 million in 2007-08 while India's imports from that country increased 52% to $569 million during the year. EEPC expects a 100% jump in Indo-Malaysian bilateral trade in engineering goods in the current year.

"As per feedback from 54 out of 169 Indian engineering companies which participated in the Indee, 590 new contracts were generated during the exhibition," said Mr Shah.

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India-ASEAN to sign trade pact on Dec 18: Ramesh

NEW DELHI: India and the 10-nation ASEAN will sign around December 18 this year the Free Trade Agreement in goods, negotiations for which have been wrapped up, Minister of State for Commerce Jairam Ramesh said today.

"We will formally be signing the FTA with ASEAN around December 18," Ramesh said at a seminar on ASEAN-India FTA organised by think-tank RIS and the Asian Development Bank.

The deal will be inked at the India-ASEAN Summit in Bangkok, to be attended by Prime Minister Manmohan Singh.

Ramesh said India has shown "remarkable flexibility" in terms of the Rules of Origin and approach to tariff heading, while negotiating the trade pact with the Association of South East Asian Nations despite having a trade deficit with the bloc.

In 2007-08, India's exports to ASEAN were USD 16 billion while imports were USD 24 billion. After the signing the pact in goods, the two sides would begin negotiations for an agreement in services and investment.

India concluded talks for a FTA with the 10-nation bloc last month. While it would eliminate or substantially reduce duties on almost 96 per cent of the items it trades with ASEAN, India is protecting its sensitive agriculture sector by keeping over 300 items out of the trade agreement.

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The global crisis and its impact on India

Globalisation has ensured that the Indian economy and financial markets cannot stay insulated from the present financial crisis in the developed economies.

The debate, therefore, can only be on the extent of impact and how resilient India is to withstand the storm with minimal damage! In the light of the fact that the Indian economy is linked to global markets through a full float in current account (trade and services) and partial float in capital account (debt and equity), we need to analyse the impact based on three critical factors: Availability of global liquidity; demand for India investment and cost thereof and decreased consumer demand affecting Indian exports.

The concerted intervention by central banks of developed countries in injecting liquidity is expected to reduce the unwinding of India investments held by foreign entities, but fresh investment flows into India are in doubt.

The impact of this will be three-fold: The element of GDP growth driven by off-shore flows (along with skills and technology) will be diluted; correction in the asset prices which were hitherto pushed by foreign investors and demand for domestic liquidity putting pressure on interest rates.

While the global financial system takes time to “nurse its wounds” leading to low demand for investments in emerging markets, the impact will be on the cost and related risk premium. The impact will be felt both in the trade and capital account.

Indian companies which had access to cheap foreign currency funds for financing their import and export will be the worst hit. Also, foreign funds (through debt and equity) will be available at huge premium and would be limited to blue-chip companies.

The impact of which, again, will be three-fold: Reduced capacity expansion leading to supply side pressure; increased interest expenses to affect corporate profitability and increased demand for domestic liquidity putting pressure on the interest rates.

Consumer demand in developed economies is certain to be hurt by the present crisis, leading to lower demand for Indian goods and services, thus affecting the Indian exports.

The impact of which, once again, will be three-fold: Export-oriented units will be the worst hit impacting employment; reduced exports will further widen the trade gap to put pressure on rupee exchange rate and intervention leading to sucking out liquidity and pressure on interest rates.

The impact on the financial markets will be the following: Equity market will continue to remain in bearish mood with reduced off-shore flows, limited domestic appetite due to liquidity pressure and pressure on corporate earnings; while the inflation would stay under control, increased demand for domestic liquidity will push interest rates higher and we are likely to witness gradual rupee depreciation and depleted currency reserves. Overall, while RBI would inject liquidity through CRR/SLR cuts, maintaining growth beyond 7% will be a struggle.

The banking sector will have the least impact as high interest rates, increased demand for rupee loans and reduced statutory reserves will lead to improved NIM while, on the other hand, other income from cross-border business flows and distribution of investment products will take a hit.

Banks with capabilities to generate low cost CASA and zero cost float funds will gain the most as revenues from financial intermediation will drive the banks’ profitability.

Given the dependence on foreign funds and off-shore consumer demand for the India growth story, India cannot wish away from the negative impact of the present global financial crisis but should quickly focus on alternative remedial measures to limit damage and look in-wards to sustain growth!

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Farmers take part in referendum on Reliance Group SEZ

In the first exercise of its kind in the country, landowners and farmers in 22 villages in Raigad district, about 80km from here, on Sunday expressed their opinions in a referendum on whether they supported or opposed the Reliance Group's proposed Special Economic Zone.

Thousands of farmers and landowners of villages located in Pen tehsil submitted their opinions to the state government in a form containing "yes or no" answer.

Preliminary reports said about 5,869 out of an approximately 30,000 landowners expressed their opinions.

Farmers, who had already given permission for land acquisition for the SEZ and those had possession of their property, could submit their opinions which will be compiled into a report and submitted to the state government, a senior official said.

The district authorities will take up the result of the referendum tomorrow and give a report to the government.

"Approximately 2,307 hectares of land which is under the Hetwane dam irrigation scheme is located in the 22 villages. The land is also eligible for acquisition for the SEZ," Sameer Kurtkoti, Deputy Collector (Land Acquisition Department), said.

Farmers of the 22 villages had opposed the project stating their properties came under arable land due to the irrigation project and was ineligible for the SEZ.

Amidst tight security, landowners began submitting their opinions at primary schools in their villages and the process continued from 0900 hours to 1700 hours. Video cameras were used to document the proceedings.

Over 170 government officials and hundreds of police personnel, including State Reserve Policemen, were deployed to ensure security in the region.

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CBEC wants SEZ units to be surveyed for service tax compliance

New Delhi, Sept. 19 SEZ units providing taxable services to recipients outside the special economic zones (SEZ) are under Government scanner, with revenue department officials being directed to submit by October 31 a report on whether such units were discharging their service tax obligations or not. The report is to be submitted to the Director-General of Service Tax.

The Central Board of Excise & Customs (CBEC) directive to survey the SEZ units follows a recent report of the Comptroller and Auditor General (CAG) which highlighted that certain SEZ units in Chennai and Kochi were providing taxable services such as manpower supply services, technical testing and analysis service to units / persons outside the zone without payment of service tax.

Taxable services received by SEZ units and SEZ developers for consumption within the SEZ are exempt from service tax. However, service tax is applicable on taxable services provided by SEZ units, except in situations where specifically exempted.

In a communiqué to its field formations, the CBEC has said they should ensure that SEZ units, providing taxable services to any person for consumption in domestic tariff area (or providing any taxable service which is otherwise not exempt), should register with the jurisdictional service tax authorities and discharge their service tax liability.

Meanwhile, CBEC has also clarified that SEZ units claiming refund of service tax should register with the jurisdictional service tax authorities (i e. service tax commissionerates in Delhi, Mumbai, Bangalore, Ahmedabad, Kolkata and Chennai and the jurisdictional central excise commissioners elsewhere).

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Denial of export benefit to US co not discriminatory

MUMBAI: In a verdict crucial to foreign companies operating in India, the Pune Income-Tax Appellate bench has held that the denial of export benefits under Section 80 HHE of the Income-Tax Act to an American company operating in India could not be construed as discrimination between Indian and foreign companies.

This decision is critical in view of the increasing complaints from foreign companies alleging discrimination in tax treatment between them and Indian companies. The company, which approached ITAT claiming that the denial of Section 80 HHE benefit is discrimination under Article 26 of the Indo-American tax treaty, is a US company — Automated Securities Clearance.

The division bench of Pramod Kumar and Mukul Shrawat said differential treatment does not always amount to discrimination. Only when the difference in treatment is proved to be unreasonable — arbitrary and irrelevant — can it be construed as discriminatory. ITAT also pointed to the provisions in the US tax laws for permanent establishment tax levied on foreign companies, higher withholding tax requirements for foreign companies, higher penalties for foreign companies. Therefore, differences in treatment between domestic and foreign companies are institutionalised in the Indo-US DTAA, the tribunal held.

The tribunal further held that difference in treatment was based on the residential status of the company and not on the basis of the location of incorporation.

In this case, the difference in treatment on the issue of tax incentive for export is also in tune with the objectives of the legislation of such laws. The objective of such legislation was to enhance the foreign exchange reserve of the country. Therefore, the difference in treatment in this case is based on a certain rationale. There can be difference in tax treatment between the companies in India and the permanent establishment of other countries in India, but as long as the differential treatment is justified on the basis of dissimilarities in their situation, such treatment cannot be accounted as discriminatory, the tribunal concluded.

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Rupee posts biggest fall in a decade

MUMBAI: The rupee posted its biggest fall in a decade on Tuesday, hit by risk aversion and banks arbitraging a weaker offshore rate, although suspected central bank intervention stopped the slide just short of 47 per dollar.

The partially convertible rupee ended at 46.89/90 per dollar, off a trough of 46.99 which was its lowest since July 24, 2006.

The rupee fell 1.8 percent from its close of 46.05/06 on Monday, its biggest fall since May 14, 1998, according to Reuters daya, when the currency fell 2 percent after sanctions were imposed on India for its nuclear testing. One-month offshore non-deliverable forward contracts were quoting at 47.15/25, weaker than the onshore rate, indicating a bearish near-term outlook for the rupee.

That also created an arbitrage opportunity, where the dollar is bought against the rupee in the onshore market and sold in the offshore NDF market to exploit the price differential. "There are no (dollar) sellers in the market apart from the central bank. There is lot of oil, equity and NDF-related dollar demand, and even importers are covering near-term imports," said Madhusudan Somani, associate director of financial markets at Yes Bank.

"The rupee may test 47.20-25 levels in the near term," he added. Dealers said the central bank was seen selling dollars to halt the rupee's sharp decline, but sales were offset by demand for the US currency. At its low on Tuesday, the rupee was down 6.5 percent in September and more than 16 percent in 2008. Dealers estimated the central bank had sold $1.5-$2 billion to put a floor under the rupee on Tuesday.

Indian shares pulled out from a nosedive to end almost level on Tuesday after they had opened down 3.5 percent. Capital outflows from the local shares so far in 2008 total a net $8.4 billion, including $1 billion in September, a sharp turnaround from a record net inflows of $17.4 billion in 2007.

Traders said broad strength in the dollar versus other currencies overseas was also hurting sentiment on the rupee. The dollar steadied near 4-month lows versus the yen on Tuesday, but held gains against high yielders as investors took refuge in safe-haven assets following the collapse of Lehman Brothers.

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