Widespread disruptions have been caused by the rising rupee. Even 39 rupees will fetch a dollar. This has seriously impacted the export prospects of many industries, in particular, textile, garments and software.

Exporters get their sales proceeds in dollars, which, with the rising rupee, fetch lower number of rupees. Viewed alternatively, the exporter has to quote a lower rupee price to match the US market demand at a given dollar price.

While a strong rupee may delight the hearts of certain sections of markets such as importers, it brings tears to the eyes of exporters. Particularly, it affects textile workers in Coimbatore, garment industry workers and all their dependents. While initially the garment industry of Tirupur was trying bravely to face up to the rising rupee, it has now become fully aware of the impact.

The offsetting tax concessions proffered by the Government of India have been rather meagre compared to the 10 per cent hit in realisation arising from the rupee appreciation. The profit margins are too small to absorb the decline.

Chain reaction The resulting disruption in Tirupur’s exports should raise serious concern both at Delhi and Chennai. The Tirupur garment industry is an employment magnet for thousands of workers from Tamil Nadu and Kerala. The fall in earnings and resultant layoffs will cause a severe decline in the number of jobs in Tirupur.

More importantly, it can cause a chain reaction by creating a fall in demand for the yarn produced by the spinning mills of the State. The net effect may well be serious lay-offs in the textile mills of Coimbatore, which have already faced a decline in profitability for their exports of yarn arising from the rupee appreciation. The situation is grave and calls for concerted action by the RBI, Government of India as well as Government of Tamil Nadu. The RBI may well say that its hands are tied because of the impact of rising capital inflows and the costs, including inflationary impact, involved in keeping the rupee down. True, the RBI has been reacting to the inflationary consequences of its intervention in the forex market, which involves pumping in rupees to purchase dollars.

The costs of intervention are, no doubt, considerable, but we have to make a cost-benefit analysis of the two options. Is it cheaper for the RBI to intervene and accumulate dollars in its kitty to be invested abroad, albeit at a lower interest, or is it cheaper to offset the costs of a rising rupee by tax concessions and the like, or to face the loss of jobs and resulting disorder in the rural and urban areas?

Competition threat It is true that the RBI has a difficult job on its hands. The choice between different options is difficult, especially considering the fascination with India’s stock markets for foreign investors. But, the basic question arises, however, from the competition to India’s industry from elsewhere in the world.

China, with a currency that it keeps deliberately down, at least not appreciating, Vietnam, with its weak currency and abundant cheap labour, Bangladesh also with a weak currency and robust tax offsets — these offer alternative sources of supply in the garment industry. The question should be looked at holistically and cannot be solved only by looking at the costs of RBI’s intervention and inflation control.

It is time the Governments of India and Tamil Nadu look at various tax benefits they can offer the affected industries to offset the rupee appreciation. The costs of these tax offsets have to be weighed against the costs of unemployment, labour unrest and tax revenue losses arising from lower business turnover.

China beckons It is a pity that even the minor concession offered with regard to service tax itself has been whittled down. Delhi has also brought the software industry under the Minimum Alternative Tax and Fringe Benefit Tax. On the one hand, Delhi is talking of an IT boom and a garment industry boom; on the other, it is doing its worst by looking kindly at rupee appreciation and tax changes that hurt the industry.

In this context, the option of a dedicated special economic zone (SEZ) has been suggested. But, there is no SEZ in sight for garments. The dedicated SEZ for software does not offer benefits for existing software units. They have virtually to start a new software company to relocate in the SEZ.

Perhaps, they may as well consider relocating in China with more efficient SEZs. This is happening already. A number of India’s software majors are establishing themselves in China. While China’s initial steps are still small, they may well be the harbinger to a long march, unless India takes care to discipline its currency as well as tax systems to be more friendly to exporters.

Suggestions have been made that software and the garment industry should refocus attention on other markets. Although there is some merit in this, I am afraid this is counsel of despair. The affected industries have gained their markets mainly based on demand in the US, which will be sustained only if prices and services are at reasonable levels. A new branding exercise is called for to refocus attention on Europe and this will not be as productive as the US.

Concerted action The crisis to our export industries resulting from rupee appreciation calls for concerted action at the highest level. There is no point in the Government of India declaring that the RBI is independent and cannot be interfered with. This issue is far more important than the 123 agreement on the nuclear deal. The number of jobs at stake and the export volumes that are affected call for a multi-pronged approach that should attempt to address the fundamental problems.

It is true that India’s industries should become more productive. But, a sharp blow, such as the appreciation of the rupee, can be countered only by a marked structural adjustment of the industry. That takes time and investment. Required funds have to be provided and at reasonable rate of interest. Government of India must compensate the exporters for their handicaps in infrastructure, such as ports, power shortages and logistics.

Tax sops are inevitable. It is far harder to restore India’s export industries than to bear the cost of tax sops, which may be evolved in a manner that is WTO-compliant. The alternative is clear — to let the rupee fall to a reasonable level to allow industries to compete with countries such as China, Bangladesh and Vietnam.

Sometime ago, I had occasion to quote Singapore’s venerable leader Lee Kwan Yew, who had pointed out in his Jawaharlal Nehru Memorial Lecture of 2005 at New Delhi that no emerging economy has succeeded without its manufacturing sector becoming competitive globally (Refer article dated July 9, 2007).

He had pointed out the importance of a weak currency policy, which had been practised by most East Asian countries, such as China and Japan. Is it not time to heed the voice of experience?

The Securities and Exchange Board of India (Sebi) today increased the individual limit for mutual fund houses on their overseas investments by $100 million to $300 million. It has also dispensed with the sub-ceiling linked to the net assets of a mutual fund as on March 31, 2007, and extended the scope of their overseas investments to Real Estate Investment Trusts (REITs).

The move, which is aimed at encouraging more mutual funds to launch offshore schemes, follows the Reserve Bank of India’s decision yesterday to hike the overall limit of $5 billion for overseas investments by mutual funds from the earlier $4 billion.

Sebi has also done away with the requirement of 10 years experience of investing in foreign securities for being eligible to invest in foreign exchange traded funds.

Further, mutual funds can now invest in American depositary receipts and global depositary receipts, initial and follow on public offerings at recognised overseas stock exchanges, investment grade foreign debt securities in countries with fully convertible currencies and money market instruments, government securities. Sebi has also allowed investment in derivatives traded on recognised stock exchanges overseas only for hedging, and portfolio balancing with underlying as securities and investment grade short term deposits with banks overseas, repos as pure investment avenues without involving borrowing of funds.

Sebi, in a press release, said it will allow mutual funds to invest in securities issued by overseas mutual funds registered with overseas regulators and investing in approved securities or REITs listed in recognised stock exchanges overseas or unlisted overseas securities (not exceeding 10% of their net assets).

The Reserve Bank of India has been increasing the overseas investment limits by mutual funds over the last one year or so. During November last year, the central bank hiked the overseas investment limit from $2 billion to $3 billion, which was further increased by another $1 billion in April this year to $4 billion.

A slew of fund houses including Sundaram BNP, DSP-Merrill Lynch, Fidelity, ICICI-Prudential, Tata AMC and Kotak Mutual Fund have launched schemes, which will invest either fully or partially in overseas equity investments, or in overseas ETFs. UTI Mutual Fund and HSBC MF are also planning to launch schemes that would invest in overseas equities

Central Depository Services India Limited  (CDSL) is pleased to announce the launch of its SMS alert facility – SMART (SMS Alerts Related to Transactions) w.e.f. from October 01, 2007.  SMART will be made available to all CDSL demat account holders who have registered for this facility. Initially SMS alerts will be sent for all types of debits, subject to a maximum of four ISINs; and for credits into the account due to IPO and corporate actions.

“The SMART facility will make it convenient for demat account holders to monitor their accounts wherever they go and will reduce risks and enhance the efficiency of systems. Further, account holders can also get details of IPO & corporate action credits, which will  help them to take timely investment decisions. I, therefore, strongly urge investors to register for this facility.”, said Mr. V. V. Raut – Managing Director & CEO (CDSL).    

Demat account holders desirous of availing the service will have to submit the SMART registration form duly completed to their DP. The registration form can be obtained from the DP or downloaded from CDSL’s website www.cdslindia.com.  At present the SMART facility will be provided free of cost to investors. 

The rise of the benchmark Sensex from the 14000 range in January this year to the 17000 range currently, does not appear to have roped in any more retail investors than normal, if the number of new demat accounts are anything to go by.Monthly gross additions to demat accounts at National Securities Depository Ltd have been averaging 1.25 lakh for some time now, said Mr Jayesh Mule, Executive Vice-President, NSDL. At Central Depository Services Ltd (CDSL), monthly additions have been averaging 1 lakh.

A senior official with one of the two largest depository services companies in the country went one step further and cautioned against reading any immediate connection: “There is no direct correlation between the Sensex and the number of accounts opened,” he said.

Since retail investors account for the bulk of demat accounts, would it indicate that this segment, while holding a steady optimistic view of the market, is not easily swayed by market sentiment?

“It must be noted that the current market rally has been entirely led by FIIs. Domestic financial institutions, as well as the retail segment, have been net sellers,” said Ms Anita Gandhi, Head of Institutional Business at Arihant Capital Markets.

Retail might have participated through mutual funds as well; this would not show an addition in demat accounts, she added.

‘settling down’  With the demat concept being rather new in the country, it is still in the process of “settling down” to a steady state, said officials with the depositories. Accounts without PAN numbers had to be frozen from January this year, which did skew the numbers, they said.

Some advise a note of caution in going by additions to the demat accounts.

“There are people who have more than one demat account who may be consolidating them,” said Mr Mule.

On the other hand, there are several people, such as government employees or home-makers, who have had demat accounts for a long time and who start activating them over a period of time, said an official with a Mumbai-based broking firm.

There is bound to be a time lag between a rally in the markets and retail participation, note marketmen.

“At a certain level (of the stock market index) there is a point of inflection,” said Mr Anil Kaul, Head, Retail, ICICIdirect.com.

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“When there are large IPOs you will see an increase in numbers of people trading. People start with mutual funds and IPOs, and when they start feeling comfortable, they may invest directly in stocks,” he said.

The latest figures show that NSDL and CDSL demat accounts number around 1 crore.