India’s rupee depreciation could prove both a benefit and a setback for the country’s textile and apparel exports, according to a new report.
The country’s currency has lost 20 percent of its value this year, and the rupee weakened by roughly 3 percent to a two-year low right after China devalued its yuan last month. India’s rupee was trading at $66.40 against the dollar Wednesday and by the end of November, the exchange rate is expected to be closer to $65.83 on the dollar.
India’s leading credit agency ICRA, a Moody’s partner, released a report on the impact of the recent rupee depreciation, breaking down its effects on fiber, yarn and apparel.
Textiles make up close to 12 percent of India’s exports and after posting double digit growth last year, exports for fiscal 2015 were flat at $37.65 billion on account of a dip in cotton yarn exports directly attributed to a decline in demand from China.
Of India’s total fiber exports, 70 percent were cotton—most of which went to China. The rupee’s depreciation improves the country’s cotton competitiveness in U.S. dollar terms as it will be able to offer lower prices.
“While the domestic cotton prices may not increase significantly due to surplus cotton stock, it will prevent build-up of large stocks domestically. Overall, it will lead to lower USD prices for cotton in international markets,” the report noted.
As much as 75 percent of India’s yarn production is in cotton. Again, China’s lower intake was partially to blame for the 13 percent decline in India’s cotton yarn exports.
Despite the higher year-to-date depreciation of the rupee, the recent yuan devaluation means Indian yarn will be more costly in yuan terms if Indian spinners don’t lower their selling prices.
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The ICRA still said it expects India’s yarn exports to remain strong, however, because of China’s cotton deficiency (it’s the world’s largest cotton importer) and the duty free benefits China enjoys on yarn make it more lucrative to import yarn over cotton.
But, according to the report, because China’s buyers are aware of the rupee depreciation, the stable cost of cotton in India and their increased yarn cost in yuan terms, they will likely try to renegotiate yarn prices in dollar terms.
“Accordingly, the Indian spinning mills will not get the full benefit of rupee depreciation and the impact can vary from company to company depending on its product and customer diversity, bargaining power with customer and exposure to Chinese markets,” the report noted.
Bottom line: it will likely lead to lower dollar rates for yarn in international markets.
Apparel makes up the largest portion of India’s textile exports—the country exported $21 billion worth of exports (most of which are cotton based) in fiscal 2015, 57 percent of its total textile exports.
India may be the largest cotton producer and second largest in terms of spinning and weaving capacities, but that aside, India’s share of apparel exports rings in at roughly 4 percent compared to China, which commands roughly 40 percent share of market.
“Given the price sensitive export market, the competitive pressures from China due to its currency devaluation will increase and will necessitate price reduction in USD terms to maintain export competitiveness for Indian exporters,” the report noted. “With relatively lower depreciation of Rupee vs USD as compared to Chinese Yuan, the price reductions will pose profitability pressure for Indian apparel/made-ups exporters.”
Fabric has seen steady export growth, increasing 6 percent in fiscal 2015, and despite the rupee depreciation, ICRA said it expects India to maintain its competitive advantage in cotton fabric because of competitive cotton costs, proximity to key importing countries and the currency’s higher depreciation compared to those of importing countries.
“The recent depreciation of the rupee is expected to be a mixed bag for the India’s textile exports,” the report noted. The depreciation may improve the country’s cotton competitiveness, but China’s yuan devaluation could force India’s prices further down for it to remain competitive.
In apparel, India’s export competitiveness will depend not only on China’s currency moves, but those of its closest competitors, Bangladesh and Vietnam too.
“As China’s yuan has depreciated more than the rupee and given that China enjoys dominant position in international export markets, India will see increased pricing competition which will affect the profitability of Indian exporters.”