We've blogged before about the adverse impact of currency valuations on the profits of Indian outsourcing firms. Several of them, including Infosys and Wipro, noted the effects of a strengthening rupee and a declining U.S. dollar when speaking to investors about recent financial performances.
So we were quite interested in a Bloomberg article highlighting research from First Global Securities Ltd. that spells out just how much Indian firms have benefited from a relatively weak rupee over the past decade or so.
First Global Securities credits "a currency subsidy" with helping create high net profits for Indian software firms. Without this subsidy, "the business looks like a dog," opines the financial analyst firm. According to First Global, the margins of the five biggest software-services exporters would have been at least 40 percent lower -- and up to 75 percent lower -- without the favorable exchange rate.
In late July, Wipro's chairman called the strong rupee "a coolant" that will hurt his firm's export business and slow domestic growth. The Bloomberg writer agrees that an appreciating rupee creates a far bigger business challenge for firms like Wipro than a slowdown in the U.S. economy.
While this is a smart strategy, according to the article, the Indian firms will also need to tweak their North American business models, by charging more for their services and/or focusing on only the most profitable deals.
Despite the considerable challenge the strong rupee presents, "outsourcing may not be a dog yet," concludes the Bloomberg writer.