Indian IT Services affected by INR appreciation

The Rupee appreciation which has inflicted the export industry from past few months and is on the verge of sweeping away some of the smaller players, is also tormenting one of the most spoken about and glamorous industries of the country – the IT industry.

The Indian IT industry, where a pay hike of 50 to 70 percent was very mundane and taken for granted on many of the occasions may not be the same again, it is getting transformed radically. A change which would affect majority of the work force in this industry and would also influence the decision of joining this industry compared to others.

This industry has been seen as one of the most rewarding sectors, however people who have been observant and have been a part of this for sometime would accept the fact that the sort of money and opportunities that were ten years back have been reducing each year and looking at the present status of rupee it can be well said that it may not improve any further, instead would deteriorate.
The rising rupee is diminishing the advantageous position of the industry as a whole. The initiative of cost cutting has already begun, which in turn translates into lay-offs for smaller firms and over utilisation of resources for bigger firms.

Everyone is feeling the pinch of sharp ascent in the rupee, however the severity of pinch is different for every individual firm.
For the top six -seven Indian players the pain is not that acute because their profit margins are way above the twenty percent range thereby the agony is less, however the firms whose profit margins were in the range of ten to twelve percent have come on their toes to fight the situation and one of the simplest weapons for them being lay offs is being utilised extremely well and cautiously.
In simple arithmetic: if the rupee moves from 45.5 to 40 it’s an appreciation of more than twelve percent, which in turn means the profit is approximately down by ten to twelve percent. This fall is not small to encounter for small firms which maybe perished with this burden.

The industry is on a turning point where suddenly the cost and resource optimisation has become the centre of attention. The companies have started focussing on lean management along with the revenues. This may also lead to consolidation in the industry which would be beneficial in the long term

US growth under pressure and Mass Selling Off

Troubled with one of the worst housing recessions and sub prime crisis, US growth is coming under pressure. The Fed lowered its benchmark interest rate by fifty basis point in mid September, to prevent the economy from plunging into recession and mitigate the outcry of massive losses and bankruptcy.

The US GDP growth has been running on consumer debt rather than on savings and the latest estimates are that the total US credit market debt is around 330% of GDP.
Due to this the American consumer is finding it difficult to maintain its earlier levels of spending/ consumption. In order to maintain the growth, credit needs to be intensified which in turn would push the economy in a deeper trouble than what it is now in.

On the surface, the world markets are getting stabilised again, however the big players are desperately trying to get rid of their mortgage obligations; similarly the US home builders are trying to dispose their properties at any available prices.
D R Horton, the second biggest US homebuilder, was unable to sell its properties, sold it for much lesser than it had initially quoted; similarly the other builders are selling homes at any price they can get.
Banks are offering discount of as much as 4 percent to sell some of the $300 billion of leveraged buyout financing they had indulged in before losses on subprime mortgages closed the market for high yield, high risk debt in July.
Investment Banks are offering finance to Vulture Funds on improved and lenient terms if they are willing to buy their (IB’s) debts. The banks have a backlog of $200 billion of LBO which they are trying to recover at discounted prices.

The Fed’s decision to lower benchmark interest rate by half percentage point has definitely assuaged the grief of the firms though is finding itself gruelling to bring the economy on a growth path again and prevent recession.