Rupee gets stronger, may cause job losses in IT sector

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The rupee has gained more than 5.5 per cent since January 2017 on back of improving macro economic indicators that make foreign investors confident to pump more and more money in the local equity market. Though a stronger rupee hurts exporters and manufacturers, the government wants a stronger rupee as it focuses on attracting more foreign capital. A stronger rupee would attract more foreign capital. Forex experts said that exporters have begun hedging their positions since March, when the rupee was trading at 65 levels.

On Monday, the rupee closed at its highest level against the American dollar since August 10, 2016. Rupee closed at 64.06 a dollar in the forex markets, up 0.39 per cent from its Friday’s close of 64.31. It had opened at 64.11 a dollar and touched a high and a low of 64.03 and 64.16, respectively. It closed to a 9 month closing high, a level seen 10 August 2016.

Cheering the markets were the inflation and IIP numbers. On Friday, the government came up with a new data series that includes more items and shifted the base year to 2011-12 from 2004-05, to help policymakers get a more accurate picture of output and price trend. While the Consumer price inflation (CPI) eased to 2.99 per cent in April from 3.89 per cent in March, the WPI inflation fell sharply to 3.85 per cent in April from 5.3 per cent. Prices of pulses, potato and onion fell sharply, triggering both retail and wholesale inflation to fall sharply while the industrial growth picked up momentum in March, government data showed. The fall in commodity prices also indirectly supported the domestic rupee.

On the other hand the US economic data was below expectation following which the dollar extended a fall to near three-week low on dollar selling by foreign banks amid weak dollar against its major peers. In addition, another missile test by North Korea over the weekend underpinned the perceived safe-haven yen. The dollar index was slightly lower on the day at 99.26.

Anindya Banerjee, currency analyst at Kotak Securities explained, “There are 3 things that favour the rupee. The US economic data released on Friday was below expectations. Secondly both the inflation and IIP numbers were good. Post the US economic data we saw a sell off in the emerging markets. Since April, the rupee was trading sideways against the dollar in five weeks versus the emerging market currencies that were making significant gains. So now the rupee can play a catchup.”

“With inflation falling further, the real interest rates are now 3.25 per cent as the CPI is around 3 per cent while the bond yield is 6.25 per cent. Unless the RBI signals that it wants to reduce rates, speculators know that the real interest rates will remain high and will fetch them high dollar returns. The economic situation, political stability, more reforms push from the government, its decision to control fiscal deficit, high real interest rates are perfect factors for the rupee to appreciate. We expect rupee to reach to 62 levels against the dollar by September,” added Banerjee.

Meanwhile local stocks opened higher on early on-set of south-west monsoon in Adaman & Nicobar amid lower inflation numbers Friday rekindling hopes of interest rate from the Reserve Bank of India (RBI) meeting early next month.

On the US data front, US consumer price rebounded in April to a seasonally adjusted 0.2% in April because of higher energy cost, the Labour Department said Friday. This followed a 0.3% drop in the prior month. However the core CPI, which excludes volatile food and energy costs, rose a slight 0.1% reversing a 0.1% decline in March.The rise in the core was tamer than expected with market consensus was for core rate to increase by 0.2% in March. US retail sales rose a solid 4.5% from a year earlier in April, but underlying data shows a massive divergence among sectors.

Meanwhile, a strong rupee is likely to impact the margins of the Indian IT industry, which is already facing headwinds due to recent policy decisions by the Trump administration on curtailing H1B Visa lottery and also getting companies to hire more Americans. Increased hiring in the US will surely lead to higher costs, when already the industry is facing pricing pressures.

Top Indian IT majors including TCS, Infosys, Wipro and HCL Technologies get a lion’s share of their revenues from the North American market and it ranges anywhere between 55 per cent — 63 per cent for these four majors, as per the latest quarter earnings. In the case of Cognizant, the revenue from the North American market is close to 78 per cent.

“Indian IT companies face two margin headwinds (stronger rupee and higher local hiring) in FY2018 in addition to the usual pressure on pricing. Given this, there is solid focus on operational efficiency improvement and automation,” points out the latest review on Indian IT industry by Kotak Institutional Equities.

According to it, the general view across IT services companies indicate that — i) hiring would be muted and perhaps on just-in-time basis, thereby leading to better utilisations; ii) focus on employee-pyramid optimisation at both onsite and offshore; and iii) efforts to increase offshorisation. Involuntary attrition could be marginally higher this year and pushback in annual wage cycle cannot be ruled out. “All in all, given multiple margin headwinds, the companies will likely exploit traditional margin levels in the near term, until automation initiatives start contributing in a big way,” the review said.

“Despite headwinds from currencies, we have ended FY17 with an industry leading financial performance, while generating strong cash flows,” V Ramakrishnan, CFO, TCS had said last month.

“In FY17, operating margins were steady as we continued our sharp focus on operational efficiencies,” pointed out MD Ranganath, CFO, Infosys, while commenting on the company’s Q4FY2017 performance.

While a stronger rupee is likely to impact the margins, it is unlikely to directly cause measures leading to lay offs in the Indian IT sector. In fact, Indian software industry body, Nasscom on last Friday even sought to refute media reports on large scale lay offs in the Indian IT industry.

“In fact, the industry continues to be a net hirer with over 1.5 lakh people being employed on a net basis each year, though the focus is shifting from scale to skill. Talents and skills are the key building blocks for the industry, which is intensifying investment in skilling/reskilling its workforce to strengthen its foundation on a continuous basis. Additionally, workforce realignment linked to performance appraisal processes is a regular feature every year,” Nasscom pointed out in its statement, while reiterating that no significant changes have been reported or observed this year.

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