Tuesday, May 22, 2012

Why Rupee weakening isn't helping our IT vendors...

That was the question I got from a client yesterday.

Her question wasn't out of place.  A weak Rupee should help Indian exporters as much as it dents our importers.  But she has been constantly hearing a weak Rupee will worsen India's fiscal deficit since it will go to fatten our oil import bill. And she is worried why this double whammy.

IT vendors like Infosys and TCS have negotiated price increases at a time when Rupee was appreciating. Now the trend has reversed, now it's their clients turn to ask for a wind down. Under normal circumstances, it should cancel each other out but it doesn't since 70% of their revenues come from US and Europe where there is a major social, economic and fiscal crisis.  Also the general weakening of demand is felt more in their major bread-winning vertical i.e. Financial Services.

Another reason is, during low demand situations, companies will hedge their revenues to protect their margins by booking forward covers for their forex exposure.  As a result, our IT vendors would have booked these covers (sold Dollars forward) when the Rupee was Rs.44-46 against the Dollar.  Not many would have expected Rupee to weaken so dramatically (20% in 3 months) and throw a spanner in their works.  Now Rupee is weakened to a low of Rs.55 against the Dollar, they are left to lick their wounds.

Nobody said Life is easy, after all.

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