"Falling Rupee" Stalls Diamond Industry

The diamond trade is concerned about the possible overall impact of the sharp depreciation of Indian rupee on its business. At the beginning of the current financial year the Indian rupee was ruling around 50.72 per dollar, but by 23 May, 2012, its valuation collapsed to Rs. 56 per dollar, raising fears that the rupee might depreciate further, if foreign institutional investors continue withdrawing from the Indian market and the current account deficit rises.

Normal Impact :

Normally, one might be inclined to think that depreciation of the local currency might make an exporter happy as he would thereby be able to get more domestic currency, though his export earnings in terms of foreign currency might not have gone up. In other words, the exporter’s earnings in terms of the domestic currency can be expected to increase in proportion to its depreciation.

Declining Exports :

The diamond trade, however, seems to be more worried about the declining trend of its export business. For instance, shipments of polished diamonds from the country in March 2012, collapsed by 46.51 per cent to US$ 2,117.49 million, from US$ 3,958.40 million in the same month of the preceding year. The decline in exports during the month in volume-terms was more than 50 per cent at 42.64 lakh carats, compared with 88.68 lakh carats in the same month of the preceding year. In order to push up sales, exporters are said to be already offering substantial price reduction in certain categories, however, actual outflow has been going into reverse gear. Under such a situation, overseas buyers may ask for further reductions in prices, pointing to the depreciation of the domestic currency.

Major Markets Quiet :

The US which remains the biggest market for diamond jewellery in the world is now more or less quiet. Besides, the Hong Kong market which earlier used to absorb substantial quantities of polished diamonds has now turned slack probably in view of the economic slowdown in China.

Outstanding Debts :

Moreover, quite a few Indian firms which have heavily borrowed funds from overseas banks, might now have to bear a higher burden for discharging their overseas debts. While no official estimates of such borrowings are available, some unofficial estimates place them at quite a high level. With the depreciation of the Indian rupee, the burden of discharging these could automatically go up.

Raw Materials Costly :

The diamond industry is entirely dependent on imports of rough diamonds, its main raw material. Depreciation of the rupee, is bound to push up the import cost of rough diamonds. Besides, some leading diamond manufacturers are under contractual obligations to lift certain quantities of rough diamonds from major producers at prices determined by the latter. They go on raising their prices intermittently by keeping the supply position tight. The cost of rough diamonds might thus rise, even when prospects for exports of polished diamond might remain uncertain.

This tends to place the Indian diamond trade in a perplexing situation, while its costs might rise with the depreciation of the rupee, it might not be easy for the industry to get better prices for its polished diamonds, until the overseas demand for polished diamonds revives.