The depreciating rupee against the U.S. dollar is something less to cheer and more to worry for the Indian IT (information technology) industry. Its impact over a period, particularly in the backdrop of an anticipated inflationary cost pressure, is likely to cloud the short-term gains.

“What's happening now on the rupee front will actually be a double whammy for the IT industry in the medium-term,” says Sujit Sircar, CFO, iGATE.

The inflationary conditions, he explains, will result in cost pressure for the IT companies. “Costs like travel and power will go up. Also, all import costs will impact our capital expenditure.” On the revenue front, there could be pricing pressure from clients if the depreciation of the rupee continues.

If there is something heartening, it is on the immediate front, as every percentage dollar gain, according to Mr. Sircar, “results in a 25-30 basis points increase in our margins.”

Cognizant's CFO Karen McLoughlin told a global conference organised last week by Jeffries that the company had an aggressive hedging programme.

“We have about $3.7 billion in outstanding hedges of our rupee expenses which will mature each month through 2015 at an average rate of about 51.9,” she added. Therefore, the “swings in the rupee actually don't give us either as much benefit or pain, depending which way it's going,” she said.

Currency volatility

For National Association of Software and Service Companies, more than depreciation, the volatility of currency movement is a concern that needs to be tackled since it hinders the planning process for the Indian IT-BPO industry.

According to Shiva Ramani, CEO of iOpex Technologies, the steep depreciation “provides consolation in margins in the next couple of quarters post the extinguishment of current hedges. It is also likely that IFRS accounting may actually require provision of mark-to-market losses on booked forwards against present rates at quarter-end dates and could increase provisions.”

More than the rupee slide, the broader fear for him is the loss of momentum in spend in the U.S. BFSI sector and also the turmoil in Europe. “We may not see volume growth for couple of quarters, but can see margin improvements. So, to some extent, the wage pressure that service providers feel can be managed without compromising the margins.”

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