Blink. And the rupee is now below the 40-level against the dollar. Not many would have envisioned that the Indian currency could appreciate with such velocity against the almighty greenback. But then, it has. Even finance minister P Chidambaram has his eye firmly on the unfolding situation, saying the rupee is not in a ?comfort zone? and that his ministry was constantly monitoring the situation.

So what happens if the rupee was at Rs 35 levels against the dollar? How will the industry cope if the rupee indeed hit 35? What about exports? Was Corporate India ready with a strategy to deal with the aggressive march of the Indian currency? It was surprising then that the questions were met with disbelief across quarters.

Some simply pleaded bankruptcy of imagination. These, and more answers finally came forward, given a hypothetical situation when the rupee had actually touched the 35 level against the greenback.

India could be alleviated to a developed country position without the relevant readiness, believe most bankers. Firstly, the 11% appreciation in the rupee would hit trade volumes and cheaper imports could threaten Indian industry. Exporters would start invoicing in different currencies, the preferred choice being the euro, which has been rather stable, but that would not be enough to remain competitive.

?Exports have been better in the current era of rupee appreciation than they were when the currency was depreciating,?? pointed out DK Joshi, principal economist with rating agency Crisil. However, Joshi is equally concerned about the pace of the appreciation and believes that fast appreciation or depreciation of the currency would adversely affect the economy. Living in a high interest rate zone could become a way of life. The advantage of high domestic consumption could then take a hit as salaries would not be as competitive globally as they are now.

The globalised IT industry, always the most obviously hit by any appreciation in the rupee, is, however, bravely gearing up for the eventuality. ?The clear vision is that the rupee will appreciate and in the long run one must look at moving up the value chain and improve productivity,? said RS Desikan, Group CFO of IT firm Mastek Ltd.

According to Infosys chief financial officer V Balakrishnan, ?The rupee can swing both ways. Any further rise in the rupee during the remaining two quarters of this fiscal may hit our annual revenue guidance despite hedging.?

Infosys has been preparing for the tough times ahead. ?We have factored in a loss of Rs 2,000 crore in consolidated income and Rs 250 crore in net profit due to rupee appreciation for the entire fiscal at the current rate of Rs 39.50 per dollar,? he added.

Balakrishnan, like many other IT executives, reasoned that an appreciating currency would have to be viewed as a part of life. ?In Brazil, the currency has doubled vis-?-vis the dollar. No developing country is free of currency appreciation. One of the reasons for the appreciating rupee is the huge inflow of dollars which the Indian economy cannot absorb totally. Huge oil imports is another determining factor.? However, he hoped the dollar would stabilise around Rs 39-40.

What is the strategy being adopted by the IT bellwether? Infosys has increased its currency exposure by $500 million from $900 million to $1.4 billion till September 30, 2007. ?We are proactively hedging our currency exposure to mitigate the rupee impact. For the short term, we will continue to hedge in the current range and review our position if the rupee moves upwards. We are hoping the rupee will move both ways despite volatility,? Balakrishnan said.

There are other concerns too for the India Inc in general. Ajit Ranade, group chief economist at the Aditya Birla Management Corporation, reasons that an appreciating rupee could impact employment. ?India is an open economy and there are no quantitative restrictions. Loss of profitability apart, there will also be less jobs. Many large exporting companies have already announced a hiring freeze and this is bound to happen across sectors,? he added.

Further strengthening of the domestic currency will have a scathing effect on apparel exporters too. According to Amit Goyal, president of the Confederation of Indian Apparel Exporters (CIAE), ?Indian exporters are unable to offer competing prices against China, Bangladesh and Sri Lanka; there are hardly any margins for exporters.?

The burgeoning pharmaceutical industry has a similar story to tell with active pharmaceuticals ingredients and bulk drug exporters likely to be the worst hit. Venkat Jasti, CMD of Suven Pharmaceuticals, a bulk drug exporting company, said, ?The appreciation of the rupee has affected our bottomline by 12-15% as of today. We expect it to have a 20% impact on our bottomline in the coming years. This, coupled with the 20% increase in intermediates imported from China, is bound to hit the industry badly.?

Another sector reeling under the rupee onslaught is the contract research (CRO) segment. According to iGate Clinical Research president Vasudeo Ginde, ?When we signed outsourcing deals six months back, the rupee had not appreciated so much. But now its gradual appreciation has affected our projects. Also, the salaries in the CRO segment have been soaring for the past year. Both these factors have adversely impacted the CRO industry.? Ginde said the further appreciation of the rupee would have a 15% impact on the bottomline of CROs.

Containing inflation, as the government tom-toms now, will be one of the major reasons to have the rupee appreciate as it lowers oil import costs, and thereby inflation. Here, Ranade points out that nearly 66% of imports are accounted for by gold, crude oil and capital goods, and apart from crude oil, the other two do not contribute substantially to the WPI (wholesale price index). Also, the government does not have to wait for a stronger rupee now to control prices.

On the market front, an appreciating rupee means higher inflows from overseas investors, but the overall cost is corporate competitiveness. At the moment, strong inflows are determining the direction of the rupee and not the fundamental factors, reckon economists. And to take it to 35-levels, on a fundamental basis, requires a huge transformation in India ?s balance sheet, which does not seem like happening in a hurry.

A section of fund managers do not see such a sharp appreciation in the rupee taking place quickly. Ruling out a 35-level rise, Tata Mutual Fund managing director Ved Prakash Chaturvedi said, ?The rupee will not hit 35 to the dollar over a period of three months or so. If at all that happens, it will take around 5-7 years, and there would be a simultaneous increase in the productivity of the economy. This productivity increase will absorb the impact of the hike in the rupee?s valuation. This will also mean that there will be higher value-added stocks available and this will take care of the appreciating Indian currency.? Typically bullish in tune with the market perception is Dinesh Thakkar, CMD, Angel Broking. ?If we assume that over a period of time, the rupee does hit the 35-mark, I don?t see any negatives for the market. We are a trade-deficit nation and from a microeconomic perspective, we will not be hit. It might affect the IT sector on a quarter-on-quarter basis, but the long-term story for the IT companies will remain intact as there is no other country which can match up to our IT capabilities. The manufacturing sector (exports) may take a beating as it may face stiff competition from countries like

China, but then the government will have to roll out sops to cushion that. Liquidity will be buoyant and robust, as FII inflows will increase. This also means that there would be more FDI and a deluge of portfolio investments.?

Clearly, despite the surging rupee and its discomforts, India Inc may not yet be ready for a 35-to-the-dollar scenario just yet. Strategies are being worked out, carefully. But alongside, there?s also hope that both companies and government strategies will offer the necessary resilience to counter the negative impact of such a scenario. A strong economy should back up a strong currency. However, despite the inherent resilience, whether India is ready for the rupee at 35 is a million dollar?er? rupee?question!

RBI?s forex kitty will swell

The currency appreciation will also boost the foreign exchange kitty of the Reserve Bank of India. This will be largely due to inflows as well as revaluation of the rupee at the new value, in this case an assumed level of 35 to the dollar.

For the purpose of calculation we have assumed the forex reserves to exhibit a similar rise of Rs 8,082 crore as it did for the week ended October 5 ? which includes genuine inflows and revaluation to Rs 9,92,686 crore.

If the rupee has to touch 35 a dollar, the inflows will undoubtedly be many times more than the latest data considered for calculation. Assuming the same level of incremental reserves, the forex kitty would cross Rs 10,00,000 crore at Rs 11,10,852.50 crore