Re rise not to dent exports

ECONOMIC SURVEY 2003-04/ EXTERNAL ACCOUNT

The Economic Survey expressed hope that Indian exports would continue to grow despite the rupee's rise against the dollar.

This, the Survey said, was essential as the global economy was showing signs of a sustained growth after three years of subdued growth.

It also indicated that there could be market intervention in case the rupee continued its northward journey against the dollar.

The exchange rate management policy "may entail some moderation in the exchange rate appreciation, on account of concerns about the competitiveness of exports and maintaining a stimulative macro-economic environment," it said. It is worth noting that the bulk of Indian exports are denominated in dollars.

The Survey said an expansion of the country's trade basket is necessary, as a hike in interest rates abroad may induce some reallocation of portfolio funds among regions, affecting particularly the emerging markets.

The latter would affect the flow of foreign exchange reserves to the country through the non-trade route, like invisibles and FII investment.

The Survey was written a few days before the US Federal Reserve hiked interest rates by 25 basis points. Still, it adds that despite the hardening of the rates abroad, the exchange rate management policy should continue to maintain an environment of low inflation and interest rates to push Indian exports.

It said such a stance could benefit the country enormously. India is already being seen as a new hub for exports of auto parts and other engineering goods.

Opportunities are also expected to open in the textile sector after the phasing out of the Agreement on Textiles and Clothing next year, it added. Allied to it, the rise in the foreign exchange reserves provided an opportunity for deepening of trade reforms and other administrative measures.

The document noted that in the new global scenario, the downside risks for the external sector were the high oil prices, the impact of the Chinese government's policy of slowing down its over-heated economy and the barriers to free trade set up by the developed countries.

According to the document, the management of the Indian rupee has remained broadly market determined, with the Reserve Bank of India intervening only to smoothen out volatilities in the foreign exchange market.

It adds that while the rupee has consistently gained against the dollar since May 2002, it has simultaneously weakened against other major currencies.

The reason for the spike in the value of the Indian currency against the greenback has been due to the sustained increase in the volume of foreign exchange inflows.