Bangalore: Indian software makers are throwing up their hands in despair as the rupee’s unbridled surge cuts into the earnings of a $50-billion industry that makes two-thirds of its revenue in US dollars.
Infosys Technologies, India’s second-largest software exporter, said in April that its calculations were based on an exchange rate of Rs43.10 to the dollar. Mindtree Consulting, a mid-sized firm, put the rupee at 42.3.
Both were way off the mark, beaten by the vagaries of a currency market that had by Friday, 29 June, pushed the rupee to 40.7 per dollar, up almost 10% since the start of the year and 14% in the past 12 months.
The impact of the falling dollar will be evident when the country’s information technology companies report their fiscal first-quarter earnings later this month.
“You can’t beat the market,” said Krishnakumar Natarajan, president and chief executive officer of IT services at Bangalore-based Mindtree.
“There’s no scientific basis on which you can predict foreign exchange rates.”
The company, with sales of more than $100 million last year, earns 62% of its revenue from US clients including rental-car giant Avis. It typically hedges half its dollar-denominated revenue in the forward and futures markets.
“You cannot hedge beyond a point,” said Natarajan. “And there is a cost to hedging.”
“You have to hedge at a very fundamental level by de-risking yourself from the US market, reducing your reliance on the US.”
But that scenario won’t come to pass anytime soon.
For Mindtree, which is trying to strengthen its operations in Europe and Asia-Pacific including Japan and Australia, the US market is still growing at 40% a year.
The National Association of Software and Services Companies (Nasscom) has estimated India’s software exports at $31 billion for the year ended March.
At India’s three largest software companies, net foreign exchange earnings make up 51% of sales at Tata Consultancy, 56% at Infosys and 35% at Wipro.
Software exporters have been counting on central bank intervention to stem the rupee’s rise, but the Reserve Bank of India has adopted a hands-off policy as it seeks to wrestle down inflation.
Letting the rupee rise has made imports less expensive, cushioning the impact of strong fuel prices for India, which relies heavily on imported oil priced in dollars.
A strong rupee is “good for the country because imports become cheaper,” including oil and machinery needed to reinforce India’s deficient infrastructure, said Kris Gopalakrishnan, CEO at Infosys, which logged $3.1 billion in sales last year.
“It affects exporters, of course,” he added. “And the challenge has been the rapid rise of the rupee, not appreciation per se. If it had happened slowly, we could have learned to manage.”
IT companies, while billing in dollars, are not import-intensive, unlike jewellery makers who buy raw material such as gems and uncut diamonds from abroad to polish and fashion into ornaments they ship to Western markets.
“All our expenditure is in rupees so we take a huge hit,” said Nasscom president Kiran Karnik.
Neither economists nor exporters had foreseen the advance of the rupee to 10-year highs, making it one of the biggest gainers this year and propelling India to a trillion-dollar economy.
The rise has been fuelled by inflows from investors eager to pump money into an economy that expanded a blistering 9.4% in the last financial year.
Foreign investment nearly tripled in the year to March to $16 billion from $5.5 billion in the previous year.
“The rupee appreciation is sharp and here to stay,” investment bank Credit Suisse warned in a recent report. “The impact is material for many and can no longer be ignored as cyclical.”