The strength of the Indian rupee threatens the recovery of the country's $63bn textiles sector from a "dismal" two years, in which is suffered a double whammy of rising cotton prices and then global recession.

India's textile sector has shown some signs of recovery from a slump which saw exports to the important European Union and US markets slumped by 14.7% in the April-to-September period from a year before, Fitch Ratings said.

"Exports have returned to positive growth since November and overall revenues should improve," the credit rating agency said.

However, the revival was threatened by a rupee which, on currency markets, has gained 12% since a low in March last year to sstand at about 46 rupee per dollar on Wednesday.

Cotton price

"The appreciation of the rupee has remained a challenge for Indian exporters, lowering their competitive advantage against other textile-exporting nations," Fitch said, noting competition from the likes of Bangladesh, China and Vietnam.

"If the rupee continues to strengthen, textile exports will clearly register a sharp decline."

Strong cotton prices, which have risen by 8% to 75 cents a pound in New York this month, were also taking their toll, albeit more on clothing companies than fabric or yarn groups.

"Fabric players have typically been able to pass on prices hikes in raw materials to customers," Fitch said.,

"Garment players have not been able to do so."

Domestic vs foreign

Fitch placed a "negative" credit outlook for all export-focused textile sectors, from yarn to garments, while putting a "stable" rating on most domestically-oriented segments.

"The agency expects an improvement in the credit quality of domestically-focused and synthetic textile companies, but cotton textile exporters could face another challenging year," the ratings agency said.

India's domestic textiles market, which accounts for about 65% of the industry's annual sales of $63bn, will be supported by rising consumer wealth, a growing and younger population, and an improving retail sector.

"Players such as Sutlej Textiles and Industries and Richa Industries are expected to benefit from strong demand fundamentals," Fitch said.