Information technology (IT) stocks got a new lease of life on Wednesday as the Union government’s effort to curb foreign borrowing weakened the rupee against the dollar, the currency in which most IT firms bill customers.
Shares of Infosys Technologies Ltd rose by 4.73% to Rs1,967.6, as did Tata Consultancy Services Ltd, which climbed 4.13% to Rs1,153.7 on the Bombay Stock Exchange (BSE). Other IT stocks such as Satyam Computer Services Ltd and Wipro Ltd rose 3.52% and 3.69%, respectively, to Rs479.3 and Rs476.25. The BSE IT index rose by 4.11% to 4,808.43, while Sensex, the exchange’s benchmark index, gained 2.51% to close at 15,307.98.
The rupee reached a nine-year high of 40.24 against the US currency on 24 July and hurt the profitability of IT firms in the first quarter. The US is the largest market for most IT firms. The BSE IT index has risen only by 2.91% since 1 April, while the Sensex has gone up by 22.90%.
The rupee dropped 0.20% to close at 40.52 against the US dollar on Wednesday, reacting to the government’s new norms governing external currency borrowings that effectively curb the inflow of dollars into the country. This will also help banking regulator Reserve Bank of India (RBI) manage the surfeit of liquidity in the Indian financial system.
So far, RBI has been buying dollars from the market to rein in the run-away rupee; this adds to domestic liquidity as for every dollar RBI buys from the market, an equivalent amount of rupees is released into the system. “Today’s surge in IT stocks was on the belief that the regulatory control over external borrowings of Indian companies will depreciate the rupee value and improve margin of IT firms,” said an IT analyst at a foreign brokerage who did not wish to be named. Analysts say that the weakening of rupee may be short lived and the benefit to IT companies, limited.
“Most of the analysts have pegged average rupee value for this year at 41. The current valuations of IT companies have factored this value. There is little chance for the rupee to depreciate to 41.5 or 42. So, one cannot justify a further increase in IT stock prices at this point.” he added.
In 2007, Indian IT and IT enabled services (ITES) earned around $48 billion (Rs1.95 trillion) of revenue, with about $32 billion coming from exports. The US contributed about $21.44 billion, 67% of the total revenue from exports. Demand for software exports is estimated to grow by around 30% in the current year.
Exports account for a third of the $854 billion Indian economy, and a weakening rupee would help the cause of export-oriented companies including IT firms and some pharmaceutical ones.
The government’s cap on external commercial borrowings by Indian firms was an attempt to address the surge in dollar inflows, already up $26 billion during April-July leading to an appreciation in the rupee.
External commercial borrowings which include loans and other instruments such as foreign currency convertible bonds (FCCBs) have been a growing source of funding for companies in 2006-07. Indian companies raised a record $25.3 billion, over 50% higher than the amount raised a year ago, and breaching the annual cap of $22 billion fixed by the finance ministry.
“In the near-term, we could see some rupee weakness. However, given that capital flows (even after assuming lower ECBs) are more than sufficient to finance the current account deficit,” said Rohini Malkani, an analyst with Citi Group Global Markets in a note on Wednesday. “We expect to see the rupee continue along its appreciation path. We maintain our year-end 2007-08 rupee estimate of 40 to a dollar,” she added. A report from Standard Chartered, released on Wednesday, said that in the near-term the rupee’s appreciation “looks increasinly limited.” The bank added that the rupee’s appreciation would continue in the long term. The bank’s forecast for the rupee at the end of 2007 is 41.80 to the dollar. Rajeev Malik, a Singapore-based economist with JPMorgan Chase Bank said the rupee will trade at 42 to a dollar by the end of the year.