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Thu, Jun 07, 2007 - Page 10 News List

India's IT sector highly concerned over strong rupee


India's IT industry expressed serious concern yesterday over the impact of the rupee's surge on export-dependent software exporters, already struggling with high costs.

Any hope for the industry lies in the US economy performing better than expected and the US tweaking interest rates to prop up the dollar, said Kiran Karnik, president of the National Association of Software and Service Companies (NASSCOM).

"We have had an 8 [percent] or 9 percent increase in the rupee in just the last three-to-four months," Karnik, whose organisation represents the IT industry, told reporters in Bangalore.

"This is something about which the entire industry is greatly concerned," Karnik said.

trimming profits

The US accounts for two-thirds of Indian software sales and any rise in the rupee trims profit margins of companies such as Tata Consultancy and Infosys Technologies that are at the vanguard of the US$48 billion industry.

NASSCOM has estimated India's software exports at US$31 billion in the year ended March.

Net foreign-exchange earnings make up 51 percent of sales at Tata Consultancy, 56 percent at Infosys and 35 percent at Wipro.

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.

"All our expenditure is in rupees so we take a huge hit," Karnik said.

India's IT companies are already reeling under wages that are rising an average 15 percent a year in the face of a shortage of skilled engineers, while competition is increasing from emerging rivals in countries such as China.

Wages typically account for half the costs of IT companies, but there are warnings that more rises will blunt India's competitive edge.

"We have been so far able to manage them," Karnik said. "But if wage costs increase and on top of that there is dollar depreciation, we are going to have a problem."

surprise rise

The advance of the rupee to decade highs, making the currency one of the biggest gainers this year and propelling India to a trillion dollar economy, has not been foreseen by either economists or exporters who bill in dollars.

The rise has been fueled by inflows from investors eager to pump money into an economy that expanded a record 9.4 in the last financial year.

Foreign direct investment nearly tripled in the year to March to US$16 billion from US$5.5 billion a year earlier.

"The rupee appreciation is sharp and here to stay," investment bank Credit Suisse said in a report. "The impact is material for many and can no longer be ignored as cyclical."

The report said it could appreciate "by a further one to two percent in the following months."

The Reserve Bank of India has eased off from selling rupees 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.

The rupee has also risen too high, too fast and "there is bound to be a correction," Karnik said.

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