By Olaf Griese
Jul. 2 – The rupee rose marginally by 6 paise to trade at INR55.55 against the U.S. dollar early on the Interbank Foreign Exchange today. Since February, the rupee has fallen INR17.6 against the dollar, but it now seems that (at least for the time being) the continuous appreciation of the Indian currency has been paused. This year’s decline has been the greatest since the 1991 economic reforms, with several different factors contributing to the weakening of the rupee against the U.S. dollar and other currencies.
Besides the obvious concerns associated with the decline of the Indian currency, opportunities can also arise out of this particular situation. For foreign invested enterprises (FIEs) considering investment opportunities in India, the current economic climate may provide the right moment. The share capital in the country is nominated in INR and the legal requirement of INR100,000 has been substantially discounted if you take into account the currency situation. Investment into India has simply become cheaper – in currency terms – than several months ago.
It is also an opportune moment to upgrade your operations in India. An FIE operating as a trading entity will most likely face difficulties in the current situation. Although products sourced in India become cheaper with the appreciation of the rupee, the price advantage will probably not be able to be preserved in full while dealing with customers as they will probably ask for a price adjustment reflecting the present currency situation.
Exports to India will have to deal with price increases because of the weak rupee, however this disadvantage could be turned into a strategic advantage. The case of the German car multimedia system manufacturer Blaupunkt illustrates this purpose.
“Rupee depreciation has made imports costlier and our clients have asked us to start local production,” Lars Placke, global CEO of Blaupunkt, told the Hindustan Times.
A local production company would clearly have a price advantage over a trading company limited to import products for the local market.
It is interesting to note that Blaupunkt re-entered India only a couple of months ago through a joint venture with its Indian distribution partner AutoSonics India. Previously, the brand had been present in India for almost 15 years through different multi-channeled distribution networks. One of the JV targets is to set up a distribution network in India.
Location is an important decision when it comes to the decision of establishing a manufacturing plant. In India, we see more and more industrial clusters developing. In the case of Blaupunkt, the manufacturing facility will most likely be in Pune. The city is becoming more and more a center of the car components industry and is attracting global companies. Recently, French auto components maker Faurecia set up a new R&D facility in the city to establish their Asia business. Experts name the city India’s Detroit.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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