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Rupee volatility: Exporters find it tough to take pricing decision

IT sector is struggling to come to terms with the sharp volatility in the exchange rate.

Written by ENS Economic Bureau | New Delhi |
August 30, 2013 3:14:30 am

Despite the hammering that stocks have received over the last week,IT sector shares have been consistent performers on the bourses,with the BSE IT index up over 6 per cent during the last week and well over 8 per cent the last month.

On the ground,though, the IT sector is struggling to come to terms with the sharp volatility in the exchange rate,an issue flagged on Thursday by Nasscom president Som Mittal. The continuing volatility in the rupee,he said,is hindering IT firms in signing new contracts with foreign clients,specifically on the issue of the value of the rupee to be quoted in the contract.

“It is a real problem. We don’t know where to hedge,our customers don’t know where to hedge,” Mittal said. “Now the question is when I’m going to sign contracts,I don’t know what the currency rate is going to be. My problem is shall I do it at Rs 60,Rs 65 or Rs 70 to the US dollar. So I have a problem is if I don’t see stability at what basis do I price. What do I tell my customer,what is the rate?” The rupee has declined about 27 per cent since April. On the perceived advantage that should theoretically accrue on account of the rupee becoming cheaper against the greenback,Mittal said while it does help some small contracts depending on what has not been hedged,in most of the long-term contracts that are spaced over a period of 4-5 years,the amounts are generally hedged and the benefits of a sharp fall in the value of the domestic currency become largely immaterial.

“We have severe competition. In our case there is no elasticity of demand. So the exports doesn’t go down,it gets depressed in dollars. So if I was selling my services at $50 and I think I’ll pass on the benefit to the client at $45,my top line came down.”

Mittal said the industry needs a stable currency as it helps in signing contracts. “So actually,we want a stable currency,” he added. Nasscom expects the $108 billion Indian IT industry to clock export revenues of $84-87 billion maintaining a growth rate of close to 14 per cent in the current fiscal.

Other export-focussed sectors such as textiles and garments are also grappling with the problem faced by the IT sector. For the textile sector,the rupee’s sharp slide has proved to be counterproductive. As against the perceived benefits from a sliding rupee, the uncertainty in the market has,instead,offset much of the gains from the notional currency advantage in the short-run.

Especially since most exporters did take some sort of cover in the form of hedging at a pre-decided rupee-dollar exchange rate. Rahul Mehta,president,The Clothing Manufacturers’ Association,said “the uncertainty looming in different segments of the economy is making all sorts of predictions meaningless.”

According to garment exporters,there is also pressure from buyers in key markets to renegotiate contracts afresh in view of the notional gains for domestic exporters.


* Exporters such as the IT-ITeS and the textile industries are unable to decide at what price to enter into a deal due to the constant volatility in exchange rates

* As a result,exporters in the IT-ITeS and textile sectors are unable to reap the advantage of a depreciating rupee

* For long-term contracts,any passing on benefits to the customer results in depressed export earnings as the currency value is itself hedged

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