TCS, Infosys, Wipro have new worry: Surprise Rupee rally

Just six months ago, Indian companies and policy makers were grappling with a record-low exchange rate. Now, the rupee’s unexpected rebound is causing fresh problems. While the currency’s 5.6 percent jump against the dollar so far this year will help tamp down inflation, it’s posing a challenge for the earnings of India’s exporters. For information technology and drug companies already contending with an American clampdown on working visas and a wave of unfavorable inspections by the U.S. Food and Drug Administration, it’s another headache.

Tata Consultancy Services Ltd., India’s biggest IT firm, was taken aback by the rupee’s rebound, Chief Executive Officer Rajesh Gopinathan said on an earnings call last month. While at least one senior Indian government official has flagged concerns about the currency’s strength, there’s little sign yet that the central bank is prepared to halt the rupee’s march.

That’s posing a threat to companies that garner most of their earnings overseas, including IT exporters Tata, Infosys Ltd. and Wipro Ltd., which all get more than 90 percent of revenue from abroad, and drugmakers Sun Pharmaceuticals Industries Ltd. and Lupin Ltd., with ratios above 70 percent.

“The sharp appreciation of the rupee is a matter of concern,” said Rakesh Tarway, head of research at Reliance Securities in Mumbai. “We’re recommending investors tread with caution and be selective in the IT sector given the global headwinds and also the currency spike.”

Earnings for technology companies that have reported March-quarter earnings so far have been weak, according to Deutsche Bank AG. Net incomes grew an average two percent and revenues increased 3 percent, the brokerage said in a note last week.

Powering the rupee’s rally has been India’s high bond yields and an an economy that expanded more than 7 percent in 2016, making it an investor favorite amid this year’s emerging-market rally. A thumping win for Prime Minister Narendra Modi’s party in key state elections in March spurred bets for more economic reforms, further adding to the nation’s allure.

Overseas investors have pumped about $15 billion into India’s bonds and stocks this year, driving the rupee to a 20-month high in late April. That prompted a warning from Arvind Subramanian, chief economic adviser to the finance ministry, who said April 29 that the currency’s strength was hurting exports and India needs to ensure the exchange-rate remains competitive.