Strengthening of the Indian Rupee against foreign currencies, especially the US Dollar, presents a renewed challenge to the Indian Information Technology (IT) companies looking to protect operating margins and firm up sagging bottom lines. The Indian currency has jumped 5.6% against the dollar so far this year and is causing fresh problems for the once marquee industry that now finds itself in the doldrums.
A rising Rupee is hurting the revenue growth for major Indian IT companies which export a big chunk of their services to foreign shores and earn as much as 60% of their revenues from the US alone.
Eating into growth
Revenue in the fourth fiscal quarter for TCS, India’s largest information technology company, fell 0.3% sequentially to Rs 29,642 crores from Rs 29,735 crores in spite of revenue in dollar terms rising 1.5% to $4.45 billion in the fourth quarter of from $4.39 billion in the previous quarter. Similarly, India’s bellwether IT company Infosys’ Q4 FY17 revenue fell 0.9% sequentially, in spite of the company earning more than $10 billion in revenue for the first time in a full financial year. Infosys expects its consolidated revenue growth at 6.5%-8.5% in constant currency, the same in rupee terms is expected at a meagre 2.5%-4.5%, indicating heavy pressure upon the company from the rising value of the Indian currency.
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On the upmove
Indian Rupee’s rally is a result of many intertwined factors. Firstly, foreign portfolio investors (FPIs) are investing heavily in Indian markets. According to latest depository data, FPIs invested a net Rs 5,318 crore ($825 million) in debt markets during May 2-12. When foreign investors want to buy into Indian markets, they need to sell dollars and buy rupees in order to do so.
Secondly, the dollar has been trading weak since the beginning of the year, having declined over 4 percent to date. Investors looking to buy into emerging markets have sold the dollar quite heavily over the last few months, resulting in a decline in the dollar index.
Also, last month’s uncertainty surrounding the outcome of the French presidential election had also weighed on the dollar index. US president Donald Trump’s proposed tax reforms also contributed to pushing the Dollar index below 99. These factors have resulted in the rupee rising by nearly 6 percent since 1 January 2017.
Adding to the trouble
The rise in rupee is a cause of concern for an industry that is already battling pricing pressures due to a reduction in client spends and increasingly tougher visa regimes by countries like the US, UK, Singapore and Australia, which propose drastic restrictions on work visas. The former is squeezing these companies’ margins and bottom lines, while due to the latter, these companies are finding it even more difficult to carry on with their operations in these countries in a cost-effective manner.