A rising rupee has a negative impact on the margins of Indian IT companies who live on arbitrage with very little scope for innovation. More than 50% of their earnings are in dollar terms because of their dependence on US market.
In the case of IT stocks, the market has been looking only at the rising rupee since April 2007. The IT index has lost nearly 21% to 4310.38 from its all time high of 5,611.33 recorded on 19 February 2007. On the other hand, Indian Rupee extended gains to about 11% this year, making it Asia’s best performing currency. Infosys , Satyam and TCS are the biggest losers in the IT pack.
Today, the rupee strengthened past 40 per dollar for the first time in more than nine years, after lower US interest rates brightened the outlook for high-yielding assets like the Indian currency.
Meanwhile, Indian Trade Minister Kamal Nath, has expressed his concerns on rising rupee and said that the government would look at steps to protect exporters.
Analysts feel that high crude oil prices, hovering around $80 per barrel, and Reserve Bank of India (RBI) intervention continue to be the key risk to a sustained appreciation of the Indian unit.
Our internal analysts are of the view that one can expect a re-rating of IT stocks downwards within the next couple of weeks as they come out with their half yearly results.