Indian diamond manufacturers have come under increasing pressure from the rupees recent strengthening against the dollar. From the middle of last summer the rupee fell dramatically reaching a trough at the beginning of December. Since then it has risen over 5%, including 2% during the last week. The absence of hedging tools for the diamond industry has driven manufacturers to shift capital into other assets, notably property, and equities in other sectors of the economy.

Contrary to most forecasts at the start of the year, 2005 saw the dollar rise in value, gaining almost 15% against the euro and the yen and 5% over the rupee. Most market observers had expected the size of the US current account deficit to weigh on the dollar throughout the year. The dollar weakness looks set to carry on for some time. The markets expect one more rate rise from the Fed this month, followed by a sustained period with rates on hold.

Much of the diamond polishing industry in India, which currently employs around one million people, was created during the period when the rupee was weakening against the dollar. This prolonged period of decline ended in mid-2002, when the rupee briefly fell below 49 Rupee against the dollar.

Since then the Indian currency has generally strengthened and the benefit to margins that manufacturers enjoyed through the weakening currency has ended. Since mid-2003, the pressure has increased due to rising rough prices, as a result of supply side factors which did not translate into increased prices for polished. Once hedging instruments are developed by the industry, the trade will be in a better position to ensure their future and will be less likely to have to look for investment opportunities away from the diamond sector.