Foreign exchange risk management - Indian software industry

Abstract

The Indian Software Industry has come a long way since liberalization of the Indian Economy in the 1990s. Starting with a mere $150 million in 1991-92, the software industry grew into a multi-billion dollar industry over the course of a decade. Even as the industry grew in scale and volume, it also grew by expanding beyond software services into new segments. The new century brought an outsourcing wave into the country with the software companies again at the forefront of expanding there IT operations into the ITES domain. On the whole, the Indian Software Industry clocked in revenues of over $22 billion in the financial year 2004-05 and is expected to grow at the rate of 25-30% in the near future. Software and services exports, the mainstay of the business, logged in revenues worth $17 billion in the financial year 2004-05. An interesting trend that mirrored the revenue growth of the Indian Software Industry during this period was the Rupee-Dollar Exchange Rate movement. The Rupee-Dollar rate (Re-$ rate) was 26.40 in March 1991 and the Rupee steadily went down from here to reach a bottom of 49.08 in May 2002. The Software Exports from the country grew at rates of 40-50% percent during this period. In effect, a depreciating Rupee helped the Software Industry immensely since the industry was being paid in Dollars while its costs (essentially Human Resource costs) were in Indian Rupees. The dramatic change in this trend came after June 2002 when Rupee started to rise and appreciated close to 12% vis-à-vis the Dollar in the next 22 months. This change in trend caught the Indian Software Industry unawares since it had become accustomed to working on a depreciating Rupee for over a decade. Little effort had been made by the industry to protect itself from the Exchange Rate fluctuations and consequently, stronger Rupee created a number of problems for the Software Industry. The growth rate of the industry for the financial year 2002-2003 fell to 16% (though from a larger base and under uncertain economic conditions in USA, the major market for the Software Industry). During this period, the Indian Software Industry felt the need to understand their Exchange Rate Risk.