Pricey time to open MMRCA quotes

Friday’s decision to proceed with the opening of the commercial bids of the two vendors for the Indian Air Force (IAF) tender for 126 Medium Multi Role Combat Aircraft (MMRCA) is likely to attract an additional charge upon the taxpayer.

With a stated intention to open the commercial bids within the next few days, the defense ministry will have to deal with the prospect of an automatic escalation in the effective rates it may have to ultimately pay for whichever aircraft it orders.

This is because of the recent aversion of the currency market to the Indian Rupee. The Rupee is currently trading at almost 49 Rupees to a US Dollar, having touched 50 to a Dollar recently. Why the exchange rate matters is that vendors typically quote prices in their own currencies.

So while India might have budgeted INR 42,000 crore for the MMRCA order, and the two selected vendors might have tried to price their bids as competitively as possible, their foreign currency quotes would have undergone a price escalation in recent weeks because of the fall in the value of the rupee.

Presumably, both surviving vendors, the four-nation Eurofighter consortium and France’s Dassault would have priced their bids in Euros. According to market data, the Euro has bought 62 Rupees to almost 67 Rupees in the past 120 days and is currently trading at around 66 Rupees to a Euro.

Assuming the two vendors had managed to match the budget of INR 42,000 crore in their own currency when they submitted their bids, today that amount would escalate to over INR 50,000 crore.

And what’s crucial is the exchange rate on the day the commercial bids are opened. This is because the rate that will govern the value of the the order, whenever it is ultimately placed, will be the rate on the day the bids are opened.

The Defense Procurement Procedure (DPP) specifically stipulates that the Base Currency selling rate, the rate at which the Indian Rupee is sold on the day of the opening of the commercial bids will determine the value of the order. It also says that it will only consider the prevailing rate at the Parliament Street branch of the State Bank of India to make the determination.

If the government must open the bids soon, maybe it should consider a contrivance to first flood the market with Euros. #justsaying

Note: 1 crore = 10 million