Posted by: commoditywise | January 2, 2008

Euro-ization of India’s $6 tn forex kitty

C

ommodity market players, wake up! After decades of dollarization, India’s foreign exchange kitty is now fast getting euro-ized. Accordingly, the euro component in India’s forex kitty is rising fast – possibly even faster – than the slide in the weakening dollar component. 

So, can the Indian commodity trade also be euroized? For decades, Indian trade has been dollarized, and also largely to USA. It’s time that the Indian commodity exporters began thinking in terms of euro and European markets. 

At the end of December 2007, India’s foreign exchange (forex) is valued at $6 trillion. If the exchange rate of around 1.46 euros to one Us dollar is considered, the value of India’s forex kitty in euro terms is Eur4.10874 trillion.  

On January 1, 2008, the Reserve Bank of India (RBI) reference rate for the US currency was at Rs 39.42 per dollar and the reference rate for Euro was at Rs 57.51 on Jan. 01, 2008 as against Rs 58.12 on Dec. 31, 2007. According to the figures released by International Monetary Fund (IMF), India’s $6 trillion forex kitty has over 26.4 per cent of euros and around 63.8 per cent of US dollars. Interestingly, the percentage of US dollars has declined by almost 10 per cent to 63.8 per cent from 72.8 per cent in 1999. The comparative figures of euro component in 1999 is not available, but that the percentage of euro has been rising since the past few years – in July-September 2006 it was placed at 24.4 per cent – a rise of two per cent in euro component in some 18 months to December 2007, almost the same percentage decline in US dollar component. This shows that euroization of India’s forex kitty has already begun even when neither the government nor the Reserve Bank of India (RBI) wants to say it openly. And herein is the opportunity for Indian commodity players to increasingly tap the European markets more than ever before.

EU-India trade has swelled to euro 48 bn in 2006 taking India’s trade with EU (plus UK) account for over 22 percent in 2007. For one, the share of India’s exports to EU countries is barely around 1.7 per cent in whole of EU’s import basket. This can be increased by exporting more of Indian commodity related products to EU. According to available information, EU imports more of agriculture and energy products, iron & steel from India than it exports. http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113390.pdf 

The Indian rupee (INR) has been strengthening since more than a year now. The stronger INR has hit the margins of the exporters of commodities, goods and services and therefore, are forced to rework at their business strategies. If the IMF figures of euroization of Indian forex kitty are any indication, it is time for the players in the commodity markets to start thinking in terms of euros. Interestingly, the European Union (EU) along with UK has emerged as one of the most important trading partners. By 2006, it  Despite the stronger INR, India’s exports are rising.

However, if the commodity exporters want to earn more, it is time for them to review their export strategies and billing patterns to euro which will fetch them more compared to the weakening US dollar. Yes, India’s exports though seen to be rising are affected by the strengthening INR impacting the margins of the exporters. India’s exports grew at 26.82 per cent in November 2007, but were down from 35 per cent growth recorded in October 2007. During the eight-month period to November 2007, India’s exports have reached to $98.38 billion from $80.59 bn in the same period last year.

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