Emu And Eiro - The Rigmarole

India has a long standing relationship and involvement with Europe in view of trade, industrial collaborations, financial market operations, and political ties. The present could be considered an appropriate time for initiating the debate and formulating Indias response to these events.

As a basic postulate, a single European currency (whatever be its final composition) would be beneficial for a country like India. Various predictions that EURO would be a hard currency (like DM) are not likely to materialise as, in reality, a currency composite cannot be strong. EURO will consist of over ten currencies (if not more) not all of which are as strong as the German Mark and in any case, benefits of averaging off of exchange rates and interest rates would be available to it in the final analysis. Only when the European Union consolidates its positive features, will its currency acquire strength in the international financial markets. Indian banks and manufacturing companies will have to make advanced preparartions to conduct financial deals designated in Euro with their European counterparts from 1999 onwards. Indian banks will be required to build positions in EURO, quote EURO rupee rates, arrange swaps and forward cover in EURO and be in a position to make settlements in EURO. Banks will also be required to convert individual national currency positions into EURO after 1999.

 

Other involved Indian parties (exporters, importers and the industrial companies) would be required to comprehend these developments and make a thorough analysis of the implications of doing business in EURO after the EMU formation. The actions of banks and manufacturing companies will have to be supported by the necessary government/RBI action in terms of enabling statutes for the new forex regime in Europe.

While Euro-currency market has been a major source of raising finances for India, Eurpean capital markets (German, Swiss or the others) have not been effectively explored by India. It is likely that the European capital markets would be unified and a single EURO-designated market would emerge in due course of time. Such a unified market will be certainly convenient in view of lower transaction costs, reduced exchange risks, greater transparency in pricing and uniform market practices.A major implication for Indian industry will be in terms of collaboration agreements with a truly European industry. A typical European collabortator will have the capabilities of offering better know-how and equipment, than in the present scenario, as it will not be constrained by local boundaries in the future. A collaboration agreement also would open up greater scope for exports in the entire Eurpean region.

It would be worthwhile to study the actions of non-Eurpean institutions in this regard. India traditionally has close ties with a number of European countries and hence it will be imperative for India to comprehend the emerging scenrio in order to continue (and strengthen, wherever appropriate and possible) such ties to its benefit..

( The author is Senior Advisor, DSP Merrill Lynch, Mumbai. The views expressed here are his own.)