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Rupee pain: Nano may lose its Sri Lankan market

The depreciation of the rupee against the dollar is having an unlikely fallout on Tata Motors. Faced with increased restriction on car imports in Sri Lanka, the company may have to phase out its ultra low cost car Nano from the country, said a report in The Hindu.

Sri Lanka's central bank last week made it mandatory for car importers to pay 100 percent margin to banks for letters of credit (LCs).

The bank's move is aimed at curbing imports from its trading partners, including India, who have witnessed a sharp currency depreciation against the dollar.

"As a consequence (to falling currencies), there has been a growing possibility that the importation of motor vehicles into Sri Lanka could accelerate in the period ahead. The Central Bank believes that this trend should not be allowed to continue without a suitable response," the central bank has been quoted as saying in a press release. It will review the new rule after six months.

 Rupee pain: Nano may lose its Sri Lankan market

Sri Lanka's central bank last week made it mandatory for car importers to pay 100 percent margin to banks for letters of credit (LCs).

According to this report, Sri Lankan imports increased to $1636.50 in June 2013 from $1548.80 million a month ago. The country imports petroleum, textile fabrics, foodstuff and machinery and transportation equipment and the key partners are India, China, Iran and Singapore.

The latest move will impact auto exports from India to the island nation, where, according to The Hindu report, 75 percent of the vehicle imports are from Indian companies such Tata Motors and Maruti Suzuki.

According to the report, in May 2011, when Nano was launched in the island nation, it cost just Lankan rupees (LKR) 925,000 (which is about Rs 4.50 lakh). It rose to LKR 20 lakh after the government imposed an excise of LKR 750,000 on cars below 1000-cc.

The sales have already fallen from 400 a month at the start to 20 a month. With the new restrictions in place, there will be fewer imports of the Nano now.

The development is significant as it comes at a time when India is trying its level best to make the most of rupee's fall. According to a report in the Economic Times today, exports prospects for Indian textiles and auto components have brightened of late as countries like Sri Lanka, the US and Germany find it profitable to import from India rather than from China.

This is because China's yuan-a controlled currency-has appreciated even as the rupee has depreciated around 16 percent against the dollar this year. Depreciation of a currency makes the country's products cheaper in the international market.

For a country like Sri Lanka, the depreciation in a trading partner's currency spells trouble as there is a chance of cheap imports flooding the markets. That is the reason for the Sri Lankan central bank's concern.

In an interview to Bloomberg TV on 16 August, central bank governor Ajith Cabraal raised concerns about the falling currencies of its partner countries but said their impact on LKR has been minimal.

This is because Sri Lanka has been able to build up a little more buffer than many of its partners, particularly India, he said. This is giving the central bank a little more space to manoeuvre, he said.

The rupee's fall is giving ample opportunities for Indian companies to take advantage of. As TCA Ranganathanm, CMD, Export Import Bank of India, tells ET, "Opportunity is knocking.''

But Sri Lanka's confidence can be a cause of worry for India. Should it prompt the smaller nation to take more steps to curb imports, it will hit India hard.

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Updated Date: Dec 20, 2014 22:54:28 IST