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The IT Dollar Squeeze

Is the strong dollar hurting India's software exporters? Sure looks like it.

By Ashish Gupta

Invisibles make a big difference. After a gap of some 25 years, India started boasting of a current account surplus last fiscal, thanks to all those greenbacks earned by Indian software services. Correspondingly, on the capital account, India is loading up on foreign assets unlike ever before.

Now, according to classic market-adjustment theory, when a country's exports roar away louder than its imports, the local currency will appreciate (because of shifting demand-supply dynamics), thus raising the exports' prices overseas. If the exported goods or services are price elastic, foreign demand for them will fall.

This is what's happening, to some extent, to Indian software exporters. They can respond, of course, by slashing costs to stay competitive in the face of a weakening dollar (or shifting their target markets to stronger currency zones such as the EU), but the short-term damage is done.

Currencies move quickly, sometimes blindsiding the best of forecasters, while strategic shifts take time. Even cost-reworking takes time. Much depends on the onshore-offshore ratio of the work done by these companies. A company that has a lot of its engineers at the client's site overseas (as in Digital GlobalSoft's case) has a large proportion of its costs denominated in dollars, and is thus relatively better of with a stronger rupee. As for target markets, on average, the top ten domestic software exproters have 85-90 per cent of their contracts in US dollars. Infosys has made noises about doing euro deals to diversify currency risk, but developing businesses in Europe will take time.

The Reserve Bank of India (RBI) is trying to prevent any sudden spikes in the value of the rupee through its open market purchase of dollars (further topping its reserves). This cannot go on for too long, since forex reserves impose costs on the economy. Slowly, the RBI will probably let the rupee appreciate against the dollar.

Software exporters know that. They also know that it is not just their operating revenues that suffer on account of a rising rupee, but their non-operating 'other income' as well. Several companies have a lot of dollars parked in overseas assets (Satyam has vast sums of cash in US dollar deposits). Some of these portfolios perhaps need to be rethought.

Otherwise, the good news is that treasury departments can hedge themselves against forex volatility by using forward contracts. So analysts believe that companies could mitigate around 30-35 per cent of the downside through this mechanism.

The long-term answer to the crisis, though, might be to globalize operations so thoroughly as to have all currency movements balance each other out. That lets business transcend borders. That is how real multinationals operate, and that is one of the good things about globalization. Is there any other strategic solution?

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