The recent depreciation of the rupee against the dollar is proving to be a tailwind for the Indian IT sector, which generates 50-60% of its revenues from the US market.
“For every 1% depreciation in the rupee, there is typically a 0.5% increase in revenue and about a 1.5% rise in profit. This quarter, the currency depreciation is expected to offset furlough impacts, leading to better performance,” said Pareekh Jain, CEO, Pareekh Consulting and EIIRTrend.
So far during the third quarter, the rupee has declined by approximately 108 paise against the dollar. Analysts forecast this will enhance IT firms’ margins by 30-50 basis points (bps).
But not everyone is enthused. “For firms like ours, which are largely offshore, rupee depreciation is a mixed bag,” said Venkatraman Narayanan, managing director and chief financial officer, Happiest Minds. “While revenues get a boost, we also face forward contract losses. Net-net, it helps offset some cost increases on a quarterly basis,” he said.
Additionally, a sharper decline in other global currencies such as the Chinese yuan, Japanese yen, and Mexican peso poses competitive pricing pressures. This year, the rupee has depreciated around 2% against the dollar, compared to a 27% slide in the Brazilian real, a 19% drop in the Mexican peso, and a 12% decline in the Japanese yen.
While a weaker rupee offers short-term advantages, analysts caution that its long-term impact on competitiveness is limited. Factors such as global currency trends and cost structures will influence the sustainability of gains.
Nonetheless, the combination of a favourable exchange rate and steady demand for digital transformation projects bodes well for the Indian IT sector.
“Despite currency pressures, the sector’s growth is underpinned by strong demand, particularly in cloud and AI-driven transformation projects,” said an industry analyst.
“The rupee depreciation will act as a margin tailwind, though the exact impact depends on factors such as hedging policies and offshoring levels,” an analyst from a domestic brokerage said.
While the rupee’s decline is a boon for revenues and profits, the net benefit varies across companies due to differences in hedging strategies, offshore revenue exposure, and margin profiles.
Adding to the sector’s optimism, Nasdaq-listed Accenture raised its fiscal 2025 annual revenue growth forecast to 4-7% from 3-6%. The revision is attributed to a reduced foreign exchange impact on its US dollar results, now expected to be -0.5% instead of the earlier -1.5%.
Accenture’s improved outlook reflects a resilient demand environment, particularly for large-scale transformation projects. Indian IT firms are well-positioned to benefit from this trend, as noted by brokerage Nomura. “Clients continue to prioritise spending on large-scale transformation projects, which aligns with Indian IT companies’ focus on big-deal ramp-ups,” it said in its note.
“The improvement in outsourcing growth is a positive sign for the Indian IT services sector. We expect strong demand, coupled with opportunities in generative AI, to drive healthy earnings growth over the next three years,” Nuvama Research said in a report.