Original URL: http://www.theregister.co.uk/2013/08/23/india_outsourcing_thriving_falling_rupee/

Indian IT exporters coin windfall profits as rupee plunges

Now's the time to renegotiate outsourcing and offshoring deals

By Phil Muncaster

Posted in Business, 23rd August 2013 06:02 GMT

India has in recent weeks descended into a financial crisis, but despite dire economic warnings, industry watchers believe that the period of instability could actually benefit the country’s IT services giants and their outsourcing customers.

Wednesday saw the Indian rupee fall to another new low, dropping over two per cent to Rs64.55 against the US dollar, in what has been a grim month for India's currency and also for the nation's financial markets.

Since January the rupee has plunged more than 10 per cent against the US dollar and the signs are it could drop further, with investors losing confidence in the government and Reserve Bank of India.

Forrester vice president and India country manager Manish Bahl wrote in a blog post earlier this month that “political gridlock, serious infrastructure bottlenecks, and decreased investor confidence” are all slowing economic growth, with the falling rupee leading “directly to increases in the costs of doing business”.

Bahl told The Reg that this “tough phase” is likely to last until after the next parliamentary elections, scheduled for May or June 2014.

With a protracted period of economic uncertainty and currency volatility, what of India’s vast IT services industry and a customer base heavily concentrated in the UK and US?

Well, such is the gravity of the current crisis that industry body the National Association of Software and Services Companies (Nasscom) has been forced to release a statement, sent to El Reg:

The rupee dipping to an unprecedented low has led to investors and non-resident Indians questioning whether the rupee will further weaken or strengthen. The absolute rate is not so much a concern for the industry as the volatility. Such sudden fluctuations impact the planning process for companies and customers. We hope to see the rupee stabilise for better planning and decision making for the IT – BPM industry.

Unsurprisingly, the group, which boldly predicted that India’s IT industry would be worth as much as $300bn by 2020 – is more confident of the long-term future. It said that “the fundamentals of businesses are still strong” and that they would pass through the current volatility to continued growth.

Forrester’s Bahl was similarly upbeat.

“While the short-term outlook appears challenging, we maintain a positive long-term outlook on India due to a number of factors, including low per capita income, demographic advantage, and urbanisation, among others,” he told The Reg.

“In my opinion, it doesn't make much sense for end-clients to start moving their business from India to some other country with a short-sighted vision.”

In fact, India’s IT firms could even benefit in the short-term with the weak rupee exchange rate helping to boost the value of any income earned abroad, he said.

“This puts Indian IT services majors in a strategic position to offer lower rates to win more business and compete harder against IBM and other global majors,” argued Bahl.

“Clients should grab this opportunity to better negotiate on pricing with outsourcing players and put a model in place to revisit pricing after every two months as the Indian rupee is expected to slide further.”

Good timing for struggling outsourcers

Gartner principal analyst Arup Roy agreed that for an export-heavy industry like Indian IT services and BPO sector the low rupee is helping the country’s big players expand their margins.

In fact, the mini-currency slump seems to have come at a good time all round.

The sub-continents’ IT giants have found the cost advantage of India as an offshoring destination decreasing every year, thanks in part to rising wages and GDP, and have also had to battle increased competition from locations in Asia, Latin America and elsewhere, as well as trying to adapt their business model to make it more cloud-centric, Roy told El Reg.

The boost to margins could also come in handy given the spike in costs which could arise if a proposed new immigration bill is passed in the US, he added.

The bill, which Nasscom has labelled “discriminatory”, could force India firms to hire more US employees, pay their US-based staff more and fork out more for visas.

In this context, a weak rupee will be most welcome in the boardrooms of Infosys, Unisys, Wipro et al.

Infosys, for example, confirmed to The Register that the rupee’s rapid fall will help pay for an eight per cent pay rise it gave staff in July. It also verified comments made by CEO SD Shibulal at a conference last week that even a one per cent slump in the value of rupee will add 0.25 per cent to the firm’s operating margin.

However, Gartner’s Roy warned that while the weakened rupee would help increase profitability in the short term, it would do little to help underlying revenue growth for such firms.

The financial benefits have also been undermined to a certain extent by the fact that most of the big services players have a currency hedging policy to counter any volatility in the exchange rates, although the rupee’s slide this time has been so large as to still have some impact, he explained.

As for their customers, Roy cautioned firms to wait and see if the rupee stabilises before making any major changes.

“We’re already getting enquiries about whether they should start renegotiating,” he said.

“If this continues for a longer period, for another quarter, then it makes sense for clients to start renegotiating. For now there should be a watch and wait policy.” ®