The Hindu : Karnataka / Bangalore News : How they are coping with uncertainty

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Tuesday, Apr 08, 2008
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Karnataka

Karnataka - Bangalore

How they are coping with uncertainty

V. Sridhar

‘It is like running faster only to
find that you
have not moved’

Bangalore: Inflation may be cornering headlines these days but what worries IT (information technology) companies more is the volatility in the currency markets. Although they are wary of highlighting the negative consequences of the steady appreciation of the rupee against the dollar, there is growing unease among IT employees that their jobs may be at risk.

It is common knowledge that IT companies are with falling earnings as rupee appreciates against the dollar. Explaining the problem, a financial officer in a medium-sized IT company said, “It is like running faster only to find that you have not moved.”

In mid-2006 the U.S. dollar cost Rs. 46, today it trades at a little under Rs. 40. Although company managements have refrained from publicly airing their fears, employees say that companies are going slow on making fresh recruitments, cutting “bench strengths” and reducing payouts to employees.

In short, an air of uncertainty prevails on IT campuses. This is exacerbated by the gathering momentum of expectations that the U.S. may be lurching towards a full-blown recession.

Speakers at a recent seminar organised by the Confederation of Indian Industry (CII) addressed some of the complex issues governing currency movements and how companies are coping with volatility in foreign exchange markets.

Rostow Ravanan, Chief Financial Officer, MindTree Consulting, pointed out that the appreciation of the rupee had not only affected exporters but also the domestic companies. The integration with the world economy had meant that the rising value of the rupee made imports cheaper, which affected companies catering to the domestic market too.

The simplistic notion that demand and supply in the currency markets determine the price of a currency is no longer valid; nor are currencies determined by a country’s balance of payments position.

Mr. Ravanan said, “Currencies are now determined in a complex manner. They are determined by what happens in the stock markets, what happens to interest rates, and above all, are affected by speculative forces.”

Moreover, policy interventions by governments generate their own impact. Mr. Ravanan said that “low levels of transparency” on how prices of currencies were arrived at complicated matters even more.

So, how do companies cope with currency volatility? What methods have they employed to deal with increased levels of risk? A CFO can employ a range of options to manage risks arising out of uncertain currency markets.

Hedging is one option, employed by some leading IT companies to transfer the risk to an external agency, usually a bank. Essentially, this means that the company bets on a currency so that it can cover the losses arising from currency movements at a later date.

However, Mr. Ravanan said companies emphasised that it was not as if there were no risks associated with hedging instruments.

“They can worsen the situation instead of solving the problem,” he pointed out.

Instead, he advocated that companies choose an appropriate mix of options so that they have a balanced approach towards managing risk.

For IT employees the prescription could not have been clearer. The road ahead is uncertain. Pay increases are going to slow down and, if the worst case scenario unfolds, jobs may be in peril.

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