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Rupee expected to remain volatile
May, 26th 2009

The sharp appreciation of the rupee against the US dollar last week has once again brought in certain apprehensions for the Indian IT industry, whose revenues are significantly eroded whenever there is a rapid rise in the value of the Indian currency. However, the expectation is that the currency market, not just in India, but also globally, is expected to remain volatile in the months to come and the industry will have to manage the situation, said Infosys Technologies CFO V Balakrishnan in an interview. Excerpts:

What is your view on the upward rise of the rupee in the last one week.

There are two things about the rupee now: fundamentals and sentiments. What has been happening in the last few days is largely due to sentiment about a stable government which could bring in policy measures to ensure higher FDI and forex inflow into the country. Unless the sentiment is backed by fundamentals which will enhance higher FDI and FII inflow, I do not think this will sustain for long. If one looks at the trade account of the country, exports are still coming down and the only way we could do better is through some change in FDI norms. If that actually happens, rupee could appreciate further.

What will the impact be on the Indian IT industry?

The currency market will be volatile. The rupee has appreciated by close to 6% last week; it is huge. If the movement is gradual and small, it is easy to manage. This volatility will not benefit either exporters or importers and, globally, the currency market will remain volatile with countries being downgraded. The Indian rupee, in turn, will be impacted by both global and local events.

The industry has weathered such volatility in the past. Do you feel that it can handle the current situation more confidently?

I do not know about confidence, but we have gone through the pain, we know what it means. Importers have gone overboard on hedging more while exporters have hedged less. For us, it could mean a 3% impact on the operating margins, if the rupee manages at this level. I think this volatility will remain at least for a years time and, globally, there is a shortage of liquidity. This sharp movement benefits nobody.

What measures will Infosys takes to handle this crisis?

We will always hedge for the short term and we are using this to minimise the impact. We cannot eliminate this risk completely. Added to this, there is the movement of the cross currencies of the dollar against the euro and the pound and this is also going to impact us.

Some of the smaller IT companies have been badly affected by currency volatility in the past. What is your view on this?

When the currency becomes volatile, they will have to take a relook at their forex cover. However, these companies should take measures only if they understand what they are doing. Most of the smaller companies have not built the internal competencies to handle such a situation. They should do those things that they understand. We (Infosys) do only pure forward cover or plain vanilla forex options or pure derivatives. Companies need to understand all this before taking any step.

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