Euro loses currency for exporters .

Bangalore, May 8 The share of the euro in the Indian foreign exchange markets has shrunk sharply with the crisis in Europe.

Traders said till last year the euro's share in domestic foreign exchange markets was as high as 30 per cent. This is now barely 10 per cent. Gross trade volumes in the domestic foreign exchange markets are currently about $2.5 trillion a day, inclusive of cash, spot and forward.

Traders said exporters are now shifting back to invoicing in the US dollar fearing sharp depreciation of the euro. Fears are that the European crisis is likely to snowball to encompass Spain, Portugal, Italy and Ireland. The euro stampede resulted in a sharp dollar appreciation in the global markets since the beginning of January.

The euro has already depreciated by over 11 per cent since January against the dollar (from $1.44 to $1.27). Against the rupee, the euro has depreciated by over 13 per cent (from Rs 66.48 to Rs 57.81).

For the same period, the US dollar has depreciated by less than one per cent. The reversal has prompted a shift back to the dollar, traders said.

Till about a year ago, several exporters including of software services, had looked for euro-based invoicing to take advantage of the dollar's weakness. The shift to the euro was seen more as a strategy for hedging the bottomline against exchange rate volatility. But the traders said that exporters were switching back to invoicing in the dollar even to European destinations.

Coffee exports

The Managing Director of Balanoor Plantations and Industries, Mr Ashok Kuriyan, said, “Coffee exports have traditionally been invoiced in dollars. Recently, we had made efforts to shift to euro, in view of dollar instability. But in the current situation of currency crisis in Europe, the dollar is the best bet.”

Most of Balanoor's coffee exports are to European countries.

Forward cover

Exporters are also beginning to take forward cover as an additional precaution.

As a result, forward premia for three and six months softened to 2.84 per cent and 2.65 per cent respectively from last weekend's level of 3.34 per cent and 3.21 per cent. Part of the premium softening is also on account of a shortage of spot and cash dollars in the foreign exchange markets.

This essentially translated into traders selling forwards and buying spot for meeting current demand.

Despite the exporter forward cover, the rupee is unlikely to return to its appreciation trajectory against the dollar.

ING Vysya Bank Economist, Ms Deepali Bhargava, said, “Although the fundamental story appears intact, there is an extreme risk aversion that is happening. A slip below Rs 46 to the dollar at this juncture cannot be ruled out.”

The cash/spot dollar shortage is also partly on account of non-debt capital outflows.

This week, for the first time since the beginning of this calendar year, capital outflows were negative. Net FII outflows amounted to $185 million.

HDFC Bank Chief Economist, Dr Abheek Barua, said, “As risk aversion mounts, the outflows could also increase.”

However, importers, including refineries and corporates with foreign currency liabilities, have preferred to leave their foreign exchange positions open.

This, despite banks beginning to caution importers against leaving their positions open. European exporters, traders said, also preferred receiving payments in dollars.

For capital goods importers, the euro has become cheaper and further depreciation would result in reduction in import costs.

Source : Business Line