Indian Rupee getting hotter day by day

For the first time after nine years, the rupee breached the psychological mark of 40 to touch 39.85 against dollar on September 20, 2007. With US Federal Bank cutting the interest rate by 50 basis points, the rupee has breached the level of Rs. 40 much before than expected by the markets. The main reason being the sudden spurt in capital inflows. BNP Paribas' country treasurer Manoj rane said: "the rupee could touch 38.5 level against dollar by year-end. we can expect the rupee to rise further on the back of strong capital inflows".

Why the US FED rate cut influences our currency?

Typically, when US lowers interest rates, FIIs begin looking for greener pastures like India and China, where they can earn a higher return. When dollar inflows rise into these countries, local currencies in these markets begin to grow stronger. Hence, as a result of US FED rate cut by 50 basis points and also hardened interest rates in India combined with strong capital market, there will be a spurt in FII inflows in short term which will increase the demand for rupee and thereby, rupee will appreciate further. If the dollars coming into India are not compensated by the requirement of importers, the RBI has to intervene into the forex market by buying dollars so as to maintain the current level. But, it has side effect, the increase in money supply and thereby, inflation. Keeping in view the general elections in 2009, the Government cannot afford to neglect inflation management. As the role of RBI is limited in the present circumstances, the Rupee will appreciate further and I expect the rupee to appreciate to a level of Rs. 35 towards the end of current fiscal.

The appreciation of rupee during the current financial year already effected many sectors like IT, textiles, leather industry, pharmaceuticals. This new phenomenon has forced many mid sized software and other exporters to hedge against the foreign currency fluctuations.

With the appreciation of rupee and also acceptability of rupee increasing in the Gulf and South East Asian markets, trading in rupee futures is picking up. In Dubai exchange, rupee futures trading is already picking up.

Monetary Snapshot - September 13, 2007

The Indian rupee paused in its push towards nine-year highs on Thursday, held mostly steady by a combination of suspected central bank intervention and dollar purchases by oil refiners, traders said. The partially convertible rupee ended at 40.45/46 per dollar, just weaker than Wednesday's close of 40.4475/4550.

"The central bank seems to be defending the 40.40 level, but we are seeing plenty of dollar supplies. So, it seems they would not be able to hold the rupee around this level for long," the chief dealer with a private bank said.

On Wednesday, the Reserve Bank of India said it had bought $11.43 billion in intervention in July -- the month the rupee hit a nine-year high of 40.20 against the dollar. The central bank bought $38.1 billion in intervention in the first seven months of this year.

Traders said there was heavy dollar buying by oil firms to make import payments as oil traded near $80 a barrel. Oil is India's biggest import, and rising prices raise the risk of a wider trade deficit.

Traders expect the rupee to rise in the coming days, helped by a pick up in capital inflows. Foreigners bought nearly $780 million of local shares in the first seven days of September, taking net purchases this year to more than $9.1 billion.

The different macro economic monetary indicators

• Bank Rate (Currently this rate, which is that rate at which the RBI lends overnight money to commercial banks ) : 6.0%
• Repo Rate ( The repo rate is the rate at which the RBI borrows from the banks) : 7.75%
• Reverse Repo Rate (The reverse repo rate is the rate at which banks park their short-term excess liquidity with the RBI): 6.00%
• Call Rates (rate of inter-bank call money market where banks borrow funds to meet their RBI reserve requirements) : 5.25% - 6.15% (previous day)
• CRR (Indian banks are required to hold a certain proportion of their deposits as cash. This ratio is stipulated by the RBI ): 7.00%
• SLR (It is the amount which a bank has to maintain in the form of cash, gold or approved securities. The quantum is specified as some percentage of the total demand and time liabilities of a bank. This percentage is fixed by the Reserve Bank of India. ) : 25.0%
• PLR ( The Prime Lending Rate is the interest rate charged by banks to their most creditworthy customers. This rate is fixed by RBI) : 12.75%-13.25%
• Savings Bank Rate (Interest rate given on savings bank deposits) : 3.5%
• Deposit Rate (Interest rate paid on deposits with the banks) : 7.50%-9.60%

Exchange Rates as on 13-09-2007

INR / 1 USD : 40.4400
INR / 1 Euro : 56.2000
INR / 100 Jap. YEN : 35.3800
INR / 1 Pound Sterling : 82.0100

Source: The Economic Times, RBI

Strong rupee may shave off USD 30 bn in Indian exports

By now, it's well known that India's software industry has been hit by the rising rupee and the problem will only rise if the currency maintains its upward climb against the dollar. But what was probably not known is that IT would be the biggest loser while other sectors, which have been crying foul due to cheaper greenbacks, might see a smaller dent, thanks to lower dependence on imported raw material and clients.

A study commissioned by commerce ministry has revealed that even if exports grow 20 percent this year, the appreciation of the currency from Rs 44 to a dollar to Rs 40.50 is expected to result in a Rs 53,000 crore or USD 13 billion loss. After IT, the rupee appreciation will have the biggest impact on the profitability of meat, spices and textiles exporters followed by leather and gems and jewellery. Pharma, plantations and construction sector are expected to have a moderate impact, while engineering goods and chemicals may not be affected much.

The study said rupee appreciation has rendered 11,000 people employed in textiles and garment firms jobless during March-June this year, while another 1,900 were unemployed in the leather sector. But overall, exports are going to result in net addition of jobs, though there would be sectors with lower exports which see lower employment numbers. And, if the currency continues to rise against the dollar - which accounts for 70 percent of the export invoices - the unemployment problem will accentuate. What's more, surveys conducted for the study have revealed that there has been considerable loss of business across sectors with those that depend more on imports for their raw material needs, hit the most. So, it's the gems exporters in Mumbai and Surat, who import nearly 75 percent of their raw materials, who are expected to be hurt most, followed by silk (over 70 percent dependence on imported raw material) and machine tools and electronics (around 45 percent each). With costs rising, it's only natural that profitability would be hit. While the biggest dent has been to the IT sector - as is evident from the first quarter results of Infosys, Wipro and Satyam - the report has predicted that profitability could fall by as much as 250 percent while textile companies would be hit by up to 150 percent, leather (75-80 percent) and gems and jewellery (60-70 percent).

Sources said the impact would have been lowered a little thanks to a package of measures including higher duty remission, cheaper export insurance and subsidised loans that was announced by the government earlier this month.

Source: The Economic Times

Appreciating rupee did not deter hiring spree by softwrae companies

As per the report of Assocham, IT sector along with other sectors continued with its hiring spree during April-July this fiscal, despite being hit hard by the appreciating rupee, which ate into the profitability of a majority of sectors.

The highlights of the study are:-

• IT jobs constituted nearly 24 per cent of over 1.47 lakh vacancies listed on job portals and in newspapers during the period, followed by financial services at 14.5 per cent and sales and business development at 13.5 per cent, it added. The IT sector provides employment to over 1.6 million people directly and to about 4 million indirectly.
• The engineering sector constituted 8.7 per cent of the employment opportunities created during the said period. Job opportunities in sales and business development have beaten financial services openings listed on job portal. While the former had a 15 per cent share, the latter accounted for about 11.5 per cent.
• "Though, robust growth of economy has created numerous vacancies, severe shortage of the talented workforce and high attrition rates continue to plague the industry," Assocham President Venugopal N Dhoot said in a statement.
• Major demand for the finance personnel emanated from sectors like banking and real estate, which are estimated to hire 1.40 lakh recruits this fiscal. Human resource or administration portfolios accounted for seven per cent openings. HR professionals constituted just about 1.5 per cent of the total graduates, indicating a limited choice for firms in the sector. Manufacturing sector comprised just 6.75 per cent of the vacancies, it added. Other professions such as medical, law, media, airlines and ticketing among others constituted almost 19.5 per cent of the positions advertised.

Source: The Economic Times - August 14, 2007

Mobile firms receive windfall on rupee appreciation

Indian telecom companies are likely to get a windfall of Rs 100-150 crore during their first quarter of the current fiscal. The unexpected profits are due to the rupee appreciation, which had a negative impact on IT companies.

According to analysts, the two major companies – Bharti Airtel and Reliance Communications -- are expected to rake in Rs 100-150 crore additional profits due to foreign exchange gains. For the Aditya Birla group company, Idea Cellular, the additional profit could be around the Rs 40-50 crore levels.

The telecom companies’ capital expenditure (capex) mainly goes into equipment imports for their expansion plans. The rupee appreciation would result in foreign exchange gains as the companies are paying in dollars. The Indian rupee started appreciating against the dollar from April, rising 7 per cent this year compared with the same period last year.

Says Sumit Modi of Emkay Shares, “The majority of the active components are imported by the operators for which they pay in dollars. Therefore, the operators would benefit from the rising rupee to the extent of capex on active components.”

Idea Cellular has posted a consolidated net profit of Rs 308 crore during the first quarter of this fiscal. The net profit during the previous quarter ended March 31 was Rs 133 crore. In the case of Bharti Airtel, the consolidated total revenues for the quarter ended June 30, 2007 of Rs. 5,905 crore grew by 53% and EBITDA of Rs. 2,447 crore grew by 63% on a year on year basis. Reliance Communications is yet to announce results.

The other side of the rising Rupee

The rupee appreciation which has effected badly on the margins of export-oriented software companies, it has benefited some of the sectors also. As the Indian currency's value against the dollar moved from Rs. 44 on March 30 this year to Rs. 41 on June 30, there are many companies whose profits swelled from the above appreciation (plese see the chart below).

The companies with major imports have benefited by reducing their import bill in rupee terms. Comapnies with sizeable dollar loans have also benefited as the difference between the estimated outgo and the actual interest paid is shown as net gains from exchange fluctuations. As per the study done by Business Standard, other income, swelled by foreign exchange gains, contributed 21.47 percent of the profit before tax of 331 comapnies (financial services companies are not studied here) in the first quarter of current fiscal - the highest in five quarters. This figure was only 13.11 percent in the quarter ended June last year. If we exclude other income, the growth of PBT of these companies falls below 20 percent, when compared to their reported growth rate of 32.90 percent in PBT.

Larsen & Tubro, for example, has $600 million worth of overseas loans in dollars and yen and reported nearly Rs. 134 crore in foreign exchange gains last quarter. Pharmaceutical company Ranbaxy Laboratories, which has dollar loans of $750 million and reported foreign exchange gains of almost Rs. 200 crores last quarter, has a natural hedge against a raising rupee. Even though it lost Rs. 40 crore in revaluation of receivables, the net gain was still Rs. 160 crores. Ranbaxy earns a large part of its revenues from its US operations. However, the loss on sales front on account of rising rupee is offset by gains on forward exchange contracts. The gain earned by Ranbaxy on forward exchange contracts is almost Rs. 70 crores.

The effects of appreciating Indian Rupee in Q1 - A snapshot - Part 2

With more software companies announcing their Q1 results, the impact of rupee appreciation is clearly visible. Some more snippets on this issue.

• Wipro, India's third largest IT firm, has weathered a strong rupee to protect its operating and net margins during the first quarter (Q1) of the fiscal year 2007-08. Though the rising rupee impacted the company's sequential operating margin by 250 basis points (0.25 percent) in Q1, a healthy revenue growth of 35 per cent in dollar terms ($726 million) year-on-year (YoY) by its flagship IT division enabled it to beat the guidance of $711 million. Admitting the adverse impact of a strong rupee on its margins, Wipro's chief financial officer (CFO) Suresh Senapaty said operational improvements helped the company to partially offset the pressure on profitability arising out of rupee appreciation and limit the decline in operating margin by 250 basis points quarter-on-quarter (QoQ).
• The Hyderabad-based Satyam Computer Services Ltd., which is targeting to join the $2-billion league this fiscal, suffered a sequential slip of 3.88% in net profit for the first quarter ended June 30 to touch Rs 378.32 crore. On the year-on-year basis, the company posted an increase of 6.8% in net profit. The company did manage to put in place buffers to minimise the rupee shock. Although the impact of the rising rupee was to the tune of 400 basis points (bps), the company managed to restrict the impact to 64 bps. The company’s operating margins dropped by 64 bps in Q1 FY08 against the sequential quarter and 218 basis points when compared to the same quarter last year. The Indian currency has surged by nearly 7% against the dollar in the first quarter with every 1% rise shaving off 30 basis points at the operating margins level. Addressing the media, Satyam chief financial officer V Srinivas said, “In dollar terms, we have grown by 10% and rupee terms, the growth is 3%. The 7% difference represents the rupee impact. Revenue would have been higher by Rs 138 crore if the rupee impact was not there.” Explaining the various measures to stem the rude rupee shock, Mr Srinivas said, “Margins took a knock of 230 bps due to rupee, 100 bps on higher visa expenditure and 70 bps on restricted stock options. We could offset it by 330 bps on increased prices, higher offshoring and improved loading factor. The net margins impact was 64 bps.” Talking about forex management, Mr Srinivas said, “We have currently hedged over $750 million, bulk of which is under option-based contracts. Forward contracts account for only $175 million. But hedging does not help in improving operating margins. It only comes in handy to lower translational losses.” Currency hedging has helped Satyam bring down the translation loss to Rs 96 crore.

Related Reports:-

• How the rupee played villain for tech biggies - Moneycontrol.com - July 21, 2007
• Satyam joins Re-hit list, Q1 net down 3.9% - The Economic Times - July 21, 2007
• Wipro battles rising rupee to protect margins - The Economic Times - July 19, 2007
• Wipro: Strong Rupee Slowed Profit Growth - Forbes.com - July 19, 2007

The effects of appreciating Indian Rupee in Q1 - A snapshot

The Indian Rupee appreciating against all major currencies including US Dollar. It has appreciated from a low of Rs. 45-46 a Dollar to almost Rs. 40-41 a dollar at present, an almost 11-12% appreciation. This appreciation has effected all industries, but the brunt is borne by I.T. Sector, Textile sector and leather industry.

Information Technology Sector

India's software exporters, like Infosys, TCS, Hexaware, derive much of their income in foreign currencies and see such a rise eroding rupee earnings. A majority of these firms provide services, primarily to the US followed by Europe and the rest of the world. But the rupee has appreciated across all major currencies during the quarter – 7.1 per cent against the US dollar, 4.8 per cent against the euro, and 5.8 per cent against the pound. It is estimated that each 1 percent rise in rupee against dollar effects the margin by 35-50 basis points or 0.35 to 0.5% of software companies whose major revenue is derived from software exports. Most of the software service oriented companies reported a 10-30 per cent dip in their net profit compared with the trailing quarter’s net profit figure. While a big IT major such as Tata Consultancy Services (TCS) could offset the rupee appreciation to some extent due to its hedging, the smaller players have not been as lucky. They have just about started to hedge against the rupee appreciation.

• The 7% rupee appreciation against the US dollar during the first quarter ended June 30, 2007 took its toll on the revenues and margins of Infosys Technologies, India's second largest software exporter. “For the first time in as many years, an appreciating rupee had a 3.5% direct fallout on our operating margins. While a 13-15% increase in offshore wages and 5-6% hike in onsite salaries had an impact of 2.5%, higher visa costs contributed another 1% to the overall operational impact,” Infosys CFO V Balakrishnan said. He said Infosys was successful in neutralising the negative impact of a strong rupee by hedging against the US dollar (1.5%), increasing the utilisation rate (3%) and securing better pricing (1%) to the extent of 4%. "As a result, the impact was brought down to 3% on the operating margin. We had hedged $925 million to take forward cover at the conversion rate of Rs 40.58 per US dollar. We will increase the forward cover, if required, by hedging more. The rupee had also appreciated against euro by 4.9%, pound by 5.5% and other currencies during the quarter,” Balakrishnan pointed out.
• Tata Consultancy Services, India's largest IT services exporter, posted solid revenue and profit growth in its first fiscal quarter despite the appreciation of the rupee and escalating wage costs. TCS said its use of a hedging policy to mitigate the fluctuations in the various currencies in which it bills is paying off, and it closed the quarter with $2.5bn in outstanding hedges. Another way in which the company is attempting to offset pressure on its margins is by increasing the prices it charges to existing clients when current deals come up for renewal. During the first quarter, pricing rose 0.6%, and said it was looking at a raise of between 3% to 5% on forthcoming renewals.
• Indian software firm Hexaware Technologies Ltd. operating profit margins fell 2.8 percentage points in April-June quarter, primarily due to a rise in rupee's external value.
• Software services firm Aztecsoft, which posted a near 63 per cent decline in profit for the first quarter ended June 30, said the sharp rupee appreciation had impacted its performance. "Rupee appreciation was the fundamental reason. However, our tight control on operation and hedging has enabled us to reduce the impact," Aztecsoft Managing Director V Sunderajan said. "The revenues were impacted by 6.8 per cent on account of unanticipated exchange rate variation. However, tight control over operations, better utilisation and favourable hedging ensured that the bottomline impact was limited to 1.2 per cent of revenues," the company said.
• KPIT Cummins' profit as compared to the preceding quarter declined by 9.77 per cent due to the rupee appreciation and salary increments, a company statement said. The rupee appreciation has forced the company to revise its PAT guidance for FY08 downwards from around Rs 70 crore to around Rs 63-68 crore.

STRATEGY

To offset the rupee appreciation, the companies have managed to effect a hike in the billing rates by 3-8 per cent. They have also improved their employee utilisation rates, managed wage cost by hiring more freshers and are moving to other geographies, where the currency impact is lower. The traditional levers of utilisation, onsite-offshore mix, employee rotation and scale efficiencies should kick in, but with a lag, said ABN-Amro analysts. The key differentiator, they added, should be how quickly the companies manage costs.

Related Articles:-

• Small IT firms bear the rupee brunt - Business Standard - July 19, 2007
• Side effects of the rise in Rupee - Cybernoon.com - July 18, 2007
• Re virus hits Infy Q1 - Business Standard- July 12, 2007

Manufacturing Sector

• Textile exports declined by 6% in the April-June period of this fiscal because of an all-time rupee appreciation of 14%.
• CII said its survey of textiles and apparel export companies in the last financial year revealed that there has been a decline in total revenue, operating income and profit margin to the tune of 7.9 per cent, 8.9 per cent and 7.9 per cent respectively. Further, there could be an erosion of profit margins to the extent of 10.4 percent during the next six months only on account of a stronger rupee,” it said. “If we add the impact of rise in interest rates on the profit margins, it is a further decline of another 1.5 percent,” it said.
• Small- and medium-sized, export-oriented pharmaceutical companies are expecting a 5-10 per cent decline in their bottom line for the April-June period, owing to the rupee appreciation. The impact will be minimal on the larger companies such as Ranbaxy, Sun and Wockhardt, as they are fully hedged against the net exposure of the rupee in the international markets. “The effect of rupee appreciation will be severe on companies, which are primarily export-oriented. Any pharma or contract manufacturing firm, whose 60-70 per cent revenues come from foreign markets, will find its bottom line affected by around 10-12 per cent. The companies are unable to compensate for the losses due to the long-term contracts,” Venkat Jasti, managing director, Suven Life Sciences, said. Suven, a major Contract Research and Manufacturing Services (CRAMS) player, has most of its revenues from foreign contracts. However, major players are unfazed. “We have 10 production facilities outside the country that serve as automatic hedging towards rupee-dollar transactions,” a Ranbaxy spokesman said.
• The National Manufacturing Competitive Council (NMCC) has expressed concerns over the impact of appreciating rupee on the manufacturing sector, especially small and medium enterprises (SMEs).

Related Articles:-

• Rising rupee squeezing textiles, leather exports - Hindustan Times - July 19, 2007
• Textiles hoping to perk up exports with package - Financial Express - July 18, 2007
• CII warns of loan defaults in textiles, leather - Hindustan Times - July 16, 2007
• Re rise may not hit pharma companies - Business Standard - July 16, 2007
• Rupee appreciation hurting the SME segment in manufacturing - domain-b.com - June 21, 2007

Corporate Sector continues to shine: says CII State of the Economy report

CII released the July 2007 issue of 'State of the Economy' analysis for the last quarter-Q4 (Jan-March) results. According to the CII state of the Economy, the impressive performance of the Corporate sector is consistent and led by the Services sector. The July 2007 CII State of the Economy has surveyed and analyzed results of 3283 firms comprising 1971 firms from manufacturing and 1312 firms from services.

The highlights of the report are:-

• Corporate Sector continues to shine led by Services . The impressive performance of Corporate Sector continued in the last quarter of the financial year 2006-07, showing consistency with the GDP growth rate of 9.1 per cent achieved in that quarter (Q4). On almost all the parameters, Corporate Sector is doing better during Q4 in comparison to the same quarter in the previous financial year.
• The net sales has recorded a growth rate of 19.35 per cent in the fourth quarter (Q4) as compared to the growth rate of 17.86 per cent achieved during the same quarter in the financial year 2005-06. The profit after tax (PAT) has registered a significant increase in the growth from 13.68 per cent in Q4 of 2005-06 to 19.12 percent in Q4 of 2006-07, owing to a lower rate of growth in input cost and operating expenditures.
• It is mainly the performance of the Services sector that has resulted in the overall increase in the profits growth of the corporate sector. The Services Sector has recorded a significant decline in the growth of operating expenditure from 16.33 per cent to 10.41 per cent while showing an increase in the growth rate in net sales from 16.48 per cent to 24.74 per cent.
• Though the interest payments increased significantly showing a growth from 21.63 per cent to 47.68 per cent in Q4 of 2006-07, the Services sector companies have registered growth rate in profit after tax to the extent of 45.68 per cent against the growth in profit at the rate of 10.32 per cent in the Q4 of 2005-06. The growth rate of profit after tax of manufacturing has declined during the same period from 15.17 per cent to 7.91 per cent.
• The report has also highlighted a distressing trend in the area of Agriculture - decrease in Oilseeds production. In fact, Oilseeds production, has registered a negative growth rate of 14.79 per cent. This is likely to lead to increase in the import of edible oil due to its reduced domestic production and rising demand. The demand is rising owing to the rising income levels and growing popularity of fast foods among the rich and upper middle class. Therefore, the CII State of the Economy Survey recommends that there is need to restructure domestic pricing policy of various crops as farmers are switching from oilseeds crops like mustard to more lucrative alternatives like wheat and gram.
• The recently released Index of Industrial Production which has shown declining growth rate for manufacturing to 11.9 per cent in May 2007 from 15.1 per cent in April 2007 is in line with the warning given in this issue of the State of the Economy about the lagged effect of the increase in interest rate. The dip stick survey done by CII on behalf of National Manufacturing Competitive Council (NMCC) to assess the impact of the rise in interest rates had reported negative impact on business due to the increase in cost of financing.
• The 'CII State of the Economy' also reports the negative impact of appreciating rupee on profit margins of textile and leather sectors. The CII survey of textiles and apparel companies engaged in exports revealed that there has been a decline in total revenue, operating income and profit margin to the tune of 7.9 per cent, 8.9 per cent and 7.9 per cent respectively and further, there could be an erosion of profit margins to the extent of 10.4 per cent during the next six months only on account of appreciation of the rupee. If the impact of rise in interest rates on the profit margin is also considered, then it is a further decline of another 1.5 per cent. The impact of the appreciation is worse in the leather and leather products sector. The erosion of profits expected in the next six months is 13.7 per cent and the industry is already facing an erosion of 8.8 per cent on its profit margin.
• On the whole, the CII State of the Economy expects the GDP growth to be 9.2 percent during 2007-08; with Agriculture growing at 3 percent, Industry at 9.4 percent and Services at 11.2 percent.

Source: The website of CII

Complete Report :-

State of the Economy - July, 2007

Rising rupee will continue to hit the bottomlines of I.T. companies

A strong rupee is likely to lop Rs 1,000 cr off blue-chip IT company Infosys Technologies’ topline in FY08. Though Infosys witnessed a healthy 7.5% sequential growth in top line in dollar terms , the hardening rupee took the sheen off its performance. Infosys reported a 5.7%sequential decline in consolidated net profit, which stood at Rs 1,079 crore in the first quarter (Q1) ended June 30, 2007, against Rs 1,144 crore in the fourth quarter (Q4) ended March 31, 2007. The appreciating rupee has taken away Rs 287 crore in Q1 from Infosys, besides enquring that it misses its quarterly guidance for the second time running. “Infosys will have to maintage the appreciating rupee with higher volume growth,” said CEO & MD Kris Gopalakrishnan.

So is it the end of the euphoric times that the Indian IT sector has been getting used to — and all because of the relentless appreciation of the rupee against major currencies. The answer seems to be yes, given the fact that the Indian IT sector earns four out of every five rupees from overseas clients and that most IT exporters’ margins are being squeezed on account of stronger home currency. However, the picture is not all that sombre as there are still some sons of the soil, that have significant India operations in the highly export-oriented IT industry. ETIG has taken a closer look at some of the companies that generate sizeable revenue by serving the domestic market. These companies run operations in India profitably. They are shielded from the currency fluctuations to a great extent as only a small portion of their income is earned in foreign currency. Tulip IT Services, CMC, NIIT and Spanco are among them. While Tulip earns all of its revenue domestically, the others generate more than three-fourth of their total income from India. Larger firms like Ramco Systems and Rolta India have about two-third of revenue coming from the domestic clients. IT companies in India have traditionally looked westward for business. This was probably because the domestic market appears to be a tiny dot compared to the larger opportunities globally. Nasscom estimates the global IT market for Indian IT companies to be $45 billion.

There is something puzzling about how the government appears to be thinking about policies relating to capital inflows and the rupee. On the one hand, it is going all out to attract more foreign capital inflows and is also encouraging overseas borrowing by Indian companies. On the other hand, it now appears undecided about whether or not to allow further significant appreciation of the rupee against the dollar, a highly likely outcome if net capital inflows continue to surge. The rupee has gained more than 9 percent against the dollar since the start of the year, and touched a nine-year high of 40.28 rupees per dollar in late May. Its surge triggered complaints from small and medium-sized exporters, which account for 45 percent of the country's exports.

It is hard to fathom that April's uncharacteristically huge appreciation of the rupee against the dollar was solely the RBI's decision. It is equally hard to imagine that the central bank's return to intervention in the foreign exchange market in recent weeks is without the government's sign-off, or perhaps the intervention is at the government's suggestion.

Ambit Capital has come out with report on rupee appreciation impact on IT sector. They say every one percent Rupee appreciation could hit IT sector EBITDA margins by 40-60bps or 0.4 - 0.6%.

At the end, we have to realise that the rupee appreciation is going to stay. Many analysts say that the Rupee could appreciate upto a lvel of Rs. 35-37 per one Dollar by the end of 2007. Of course, if the government does not take any measures to reduce FII inflows, the above scenario may become a reality. As Infosys chairman and chief mentor N.R. Narayna Murthy has said, the rupee appreciation was a macro economic issue and called upon corporates to become more efficient, productive and reduce costs in operations. This meant that the revenue generated per employee in I.T. sector would have to be improved. Is this an indication of lower level of growth in employment in IT sector or lower wage increase in the IT sector?

In this respect, I would request the viewers to read the reports of Goldman Sachs, an international consulting firm, on emerging economic super powers of tomorrow - BRICs (Brazil, Russia, India, and China).

1. Dreaming With BRICs: The Path to 2050 - October 01, 2003
2. How Solid are the BRICs? - December 01, 2005
3. India’s Rising Growth Potential - January 22, 2007
4. The BRICs Dream: Web Tour

Related Articles:-

• Strong rupee hits Infy’s topline - The Economic Times - July 15, 2007
• Rupee appreciation drags down Infosys’ Q1 profitability - Navhind Times - July 12, 2007
• Infosys CFO explains the firm's currency challenge - Marketwatch - July 11, 2007
• Infosys Q1 net up 35 pct, rupee worry hits shares - Reuters India - July 11, 2007
• India's handling of rupee remains a riddle - Rediff News - July 14, 2007
• Govt eases pain of exporters hit by rupee rise - Reuters India - July 12, 2007
• A disappointing Q1 seen for tech cos - Business Line - July 06, 2007
• Re appreciation to dent ITfirms'Q1 result - Moneycontrol.com - July 06, 2007
• Rising rupee and IT stocks — Smart strategies can minimise the risk - Business Line - July 01, 2007
• Re appreciation could hit IT sector EBITDA by 40-60bps - Indiaearnings.com - March 31, 2007

Appreciating Rupee benefits diamond industry

Rising rupee may have hit the margins of the companies in some sectors such as textiles and IT sector, but the Indian diamnod indutry is for cheers with the rupee appreciating against dollar by 10% over the last five to six months. This industry imports rough diamonds worth around Rs. 40,000 Crores. Of these imports, 70 percent come from the US market.

Today, if a diamataire imports, say, one carat rough diamond costing $300, it costs him Rs. 12,000 ($1 = Rs. 40.82), which could have costed him Rs. 14,100 for the same stone if the same was purchased six months ago. "The appreciation of rupee is seen as a big respite to the diamond insutry amid the rising rough diamond prices from the last one year", said Gems and Jewellery Export Promotion Council (GJEPC) Chairman Sanjay Kothari. Mr. Kothari, however, said the industry would be benefited only if the valuation of rupee and dollar remain steady for the next six to seven months.