Indian IT firms that weathered the rupee's surge against the US dollar in the fiscal second quarter are being told to tackle it in the long-term as foreign funds flood the local market.
The rupee's 12 percent appreciation against the greenback since January is a "major concern" for the industry, said Jainder Singh, the top civil servant in the department of information technology.
The appreciation is affecting the competitive edge of software exporters and back-office firms that service US clients, Singh said on Monday at the opening of an industry conference in Bangalore.
IT firms should diversify their market base to other areas such as Europe and Japan, and reduce their reliance on the US, which absorbs two-thirds of India's software exports, he said.
That is a long-term solution, easier said than done, for an industry that earned US$31.4 billion from exports in the year to March, 33 percent up from the previous year.
Software and related service exports are set to reach US$60 billion by 2010, accounting for 5 percent of economic output and 20 percent of overall exports, Singh said.
For software firms, the rupee's appreciation reduces the local-currency equivalent of every dollar earned by an export-dependent industry that bills almost all its expenses in the local currency.
"At the end of the day, the US is the IT industry's biggest market and you can't change that," said Harit Shah, industry analyst at Angel Broking in Mumbai. "There's a limit to how much you can reduce your dependence on it."
Software makers have been hedging more of their dollar earnings against a rising local currency in the forward and futures markets, helping them weather the impact of a rupee surge that was not predicted by exporters or economists.
They have also signed up more clients and expanded business in the US and elsewhere.
Such moves helped Tata Consultancy, India's biggest software services exporter, boost net profit by 23 percent to 12.51 billion rupees (US$318 million) in the quarter ended Sept. 30.
Infosys, the No. 2, lifted net profit by 18.4 percent to 11 billion rupees. Wipro, the third-largest, posted net profit growth of 18 percent to 8.237 billion rupees.
Those firms also benefited as US companies moved work such as IT systems management and software development jobs to India to tap its vast pool of English-speaking, computer-savvy graduates at lower pay than in the US.
That advantage is being quickly eroded by the rapid appreciation of the rupee, led by a flood of overseas funds into an economy growing 9 percent a year, the fastest after China.
At Wipro alone, the depreciation of the dollar shaved 15 billion rupees off revenue in the first half.
The Mumbai stock market's benchmark index had surged nearly 45 percent for the year at Monday's close, led by overseas fund flows of nearly US$18 billion.
"The rupee is going to appreciate more as the economy expands -- we know that," said Kiran Karnik, president of the National Association of Software and Service Companies, which represents the IT industry.
"We don't expect the government to intervene because exchange rates depend on factors such as US interest rates, oil prices, that are beyond its control," he said. "But the IT industry's problem is that the rupee has risen too much too fast. There is no silver-bullet solution."
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