Indian Outsourcing Firms Gain as Rupee Falls; Wipro, Infosys and Tata Consultancy Get Earnings Boost, Thanks to Revenue Generated Abroad

August 21, 2013, 1:52 p.m. ET

Indian Outsourcing Firms Gain as Rupee Falls

Wipro, Infosys and Tata Consultancy Get Earnings Boost, Thanks to Revenue Generated Abroad

DHANYA ANN THOPPIL

BANGALORE, India—The sharp decline in the value of the rupee is a potential windfall for India’s information-technology outsourcing industry. That is because companies like Wipro Ltd., 507685.BY -0.48% Infosys Ltd.500209.BY -1.59% and Tata Consultancy Services Ltd. 532540.BY -1.07% generate more than 90% of their revenue from outside the country. “The depreciation of the rupee is positive for all exporters, including Infosys,” said V. Balakrishnan, a director and former finance chief for the company.The rupee has declined nearly 17% since May. The currency hit its seventh recent low, 64.52 to the dollar, on Wednesday. The decline has hurt many companies doing business here, for example, through higher import costs. But it benefits exporters when foreign revenues are converted to the Indian currency.

Tata Consultancy, India’s largest outsourcing company, last month reported a half percentage point increase in its profit margin for its fiscal first quarter. The company in April had given a 7% pay increase to Indian employees and a raise of between 2% and 6% to overseas workers. But those higher costs were offset by the rupee’s decline for the quarter, which ran through June.

For Infosys, the weak rupee pushed up first-quarter profit to 23.74 billion rupees ($376 million). Analysts had forecast 23.12 billion rupees.

The company also raised its outlook for revenue growth to 13% to 14% for this fiscal year from 6%-10%.

Infosys, India’s second largest software exporter by sales, last week said that the rupee’s rapid decline will help compensate for the 8% wage increase it gave employees in July.

Based on the closing price of rupee at the end of June, the company’s operating margin will increase 1.25 percentage points in the current quarter, Chief Executive S.D. Shibulal said at a technology conference last week. A 1% fall in the value of Indian rupee will add 0.25 percentage point to the operating margin of the company, he said.

The rupee’s tumble isn’t all good news, even for outsourcing companies.

“In the IT sector, which has almost $85 billion worth of exports per year, the volatility makes it difficult to price long-term contracts,” said Som Mittal, president of the National Association of Software and Services Companies. If the rupee begins to strengthen, contracts negotiated today could become far less profitable.

“Extreme volatility in the currency will hurt their ability to hedge effectively,” said Infosys’s Mr. Balakrishnan. “It is extremely difficult to take a long-term view on the currency.”

Nevertheless, the sharp fall couldn’t have come at a better time for Indian IT outsourcing companies.

Uncertainty regarding the global economy led many large potential clients to reduce tech spending last year. As a result, there was stiff competition among outsourcing companies for the few projects available, pushing down contract prices. The rupee’s decline will give Indian IT companies more leverage on pricing, analysts said.

A weaker rupee also will help offset a potential increase in the cost of doing business in the U.S.

Washington is mulling changes to immigration law that would double visa costs, raise salaries for Indian workers and probably force outsourcing companies to hire more-expensive American employees.

At the current levels of the rupee, Indian IT companies can absorb the added cost from any legislative change, UBS UBSN.VX -0.65% said in a note to clients last month.

August 21, 2013, 1:22 p.m. ET

Rupee Sinks as India Wrestles With Policy

Big Dilemma: Weaker Currency or Slower Growth

SUDEEP JAIN And NUPUR ACHARYA

MUMBAI—In July, India’s central bank effectively pushed up interest rates in an effort to shore up the country’s sinking currency. It didn’t stop the slide.

On Tuesday, the bank said it would instead loosen up on money—if only a bit. That didn’t help either. The Indian rupee hit another record low on Wednesday.

The Reserve Bank of India’s varying stance reflects shifting views about what poses the biggest immediate danger to the economy of the world’s second-most-populous country: a weaker currency or slower growth.

It is a question confronting central bankers around the developing world, as investors pull back from emerging markets in anticipation of an end to the easy-money policies of the U.S. Federal Reserve and other big central banks.

For India, whose large external economic imbalances make it especially vulnerable, the impact has been severe. The rupee fell to an all-time low of 64.52 to the U.S. dollar on Wednesday afternoon. It is down 16% since May.

Indian stocks fell in tandem, dropping 1.9%, after a fall of 4% on Friday and an additional 1.9% on Monday.

Other countries that, like India, have large current-account deficits, from Thailand and Indonesia to Turkey, have also seen currencies and markets come under pressure. Turkey’s central bank raised overnight lending rates on Tuesday.

On Wednesday, Malaysia said its current-account surplus had narrowed and economic growth slowed.

In India, much of the weight of the decision-making has fallen on the Reserve Bank’s governor, Duvvuri Subbarao, known through much of his tenure, which began in 2008, as an inflation fighter.

Mr. Subbarao’s hawkish stance at times put him at odds with a growth-focused government, which resented his calls for a smaller government budget deficit.

The central bank started cutting interest rates last year in the face of decelerating growth and slowing inflation. In the financial year through March, gross domestic product growth slowed to 5%, the lowest level in years.

But the situation grew more complicated in May, when comments by the Fed about its bond-buying program sparked the start of an investor exodus. That sent the rupee lower, further pinching India’s import-reliant economy.

By July, with the rupee down 10%, pressure was mounting for the central bank to act. On July 15, Mr. Subbarao traveled to Delhi to meet Finance Minister P. Chidambaram. The two talked for three hours.

There was apparently a meeting of the minds. The evening of the 15th, the central bank capped overnight loans to banks. About a week later it tightened monetary policy further, indirectly pushing up interest rates.

Mr. Chidambaram, who returned as finance minister in July 2012 after a stint as the interior minister, is also viewed by investors as a reforms-focussed politician. He has taken steps to reduce India’s fiscal deficit and boost foreign investment, which has yet to pick up because of a lack of clarity on some rules.

For its part, the finance ministry has been taking a series of steps aimed at restricting “non-essential imports,” such as gold, and announcing a plan to minimize cash outflows by buying Iranian oil effectively through barter.

Last week, however, critics of the central bank contend, it overreached by limiting the amount of money individuals and companies could send out of the country. That sparked fears that more-severe capital controls could be imposed, something the government has said it won’t do.

That, coupled with expectations of continued higher interest rates that would further crimp economic growth, helped spark a rout in markets on Friday.

“It didn’t work out the way they’d expected,” says Anand Shah, chief investment officer at BNP Paribas Mutual Fund in Mumbai, which manages 40 billion rupees ($634 million) in assets.

The central bank tried to reassure investors by saying that it would reverse its tightening steps when the rupee stabilized. But the currency kept falling, and investors became increasingly fearful that the higher effective interest rates would stall India’s economy recovery.

India’s financial markets have since been feeding off each other, with the falling rupee bringing stocks lower, and in turn hurting the currency. Foreign investors have pulled $1.9 billion out of Indian stocks and bonds since mid-July.

The rupee has fallen 7%, and the benchmark stock index BSE S&P Sensex has fallen 11% since mid-July. Yields on the 10-year benchmark government bond maturing in 2023 rose to a five-year high of 9.44% on Tuesday.

All of that led to the Reserve Bank’s move Tuesday, when it said it would buy back 80 billion rupees of long-term government bonds this week, effectively injecting liquidity into India’s financial system.

Investors now are waiting to see how Raghuram Rajan, former chief economist of the International Monetary Fund, will manage when he takes over as the new governor starting Sept 5. Mr. Rajan is already in Mumbai, working closely with Reserve Bank officials.

Mr. Rajan faces the task of choosing among three policy goals: boosting growth, keeping inflation low and stabilizing the rupee. Under Mr. Subbarao, the RBI has tried to juggle all three.

“What the middle solution also implies is that we have to guard on all the three fronts, with relative emphasis across the three pillars shifting according to our macroeconomic situation,” Mr. Subbarao said in March 2012.

Mr. Rajan’s academic writing, however, indicates he could take a different tack. “Focusing on a single objective—low and stable inflation—is ultimately the best way that monetary policy can promote macroeconomic and financial stability,” Mr. Rajan wrote in a 2008 article published in the Finance & Development magazine.