FALLING RUPEE - RISING IT STOCKS

Why is the rupee falling?

The rising rupee is a direct consequence of the soaring global commodity, food and crude prices. India’s oil imports make up for more than 20% of the entire country’s import bill. As consumers, we have not really borne the brunt of the rising crude prices but with imports soaring, that too at unheard of rates, it is but natural that there would be pressure on the rupee. Also, importers panicked. They sold the currency to limit losses and exporters held back selling the dollars earned on exports as they expected the dollar to appreciate further.

How much more could the rupee fall?

Forex analysts expect the rupee to come down to levels of Rs.42.50 in the short term. Unless RBI intervenes by buying the dollars, the fall will not get stemmed. Till now, there has been no intervention from the RBI; it has allowed the free market forces to pull down the rupee. But it is expected that if the rupee comes to Rs.43 levels, the RBI will intervene and stem further fall.

But if the current falling rupee is on account of the rising crude prices, then the long term prospect of the rupee, if linked to the crude prices, is not great. As per Goldman Sachs, oil is expected to touch $200 per barrel in the next 6-24 months due to lack of adequate supply and increased demand from China. What will happen then?

What does this mean for the IT companies?

The falling rupee is great news for the IT companies. Most of the frontline IT companies have managed to post a good performance for the year ended 31^st March 2008 and their guidance for the future has also been pretty good, albeit cautious. The IT companies have now learned to live with an appreciating rupee and most of them have either shifted substantial parts of the work offshore or have managed to diversify their customer base to now include clients from Europe, South-Asia, Africa and Latin American companies. Even now, there is no denying that the US markets contribute more than half these companies’ sales, and there is also no denying that the US is surely tiltled towards recession.

As per Nasscom, India’s software and services exports are expected to touch the $40-billion mark in fiscal 2008, or more than 60 per cent of the overall revenue aggregate (including software exports, the domestic and BPO segments).

Now one does not know how long this fall of the rupee would last. If its here to stay for longer time, naturally, it will mean a bountiful year for IT companies. It will now reap the benefits of not just the falling rupee but also of the moves initiated to tackle the rising rupee. And if this is just a blip on the horizon, then too, the effect of this rupee fall could be seen in the first quarter of the current fiscal.

So should one bet on IT stocks now?

For short term gains, if you are looking from a mere traders point of view, then it makes sense to bet now. But if you are a long term investor, then it’s best to wait for a clearer picture to emerge.

s.p.tulsian