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Rupee appreciation affecting software exporters

Indian IT firms that weathered the rupee's surge against the dollar in the fiscal second quarter are being told to tackle it in the long-term as foreign funds flood the local market.

The rupee's 12 per cent appreciation against the greenback since January is a "major concern" for the industry, said Jainder Singh, the top civil servant in the department of information technology.

The appreciation is affecting the competitive edge of software exporters and back-office firms that service American clients, Singh said Monday at the opening of an industry conference in Bangalore.

IT firms should diversify their market base to other areas such as Europe and Japan, and reduce their reliance on the US, which absorbs two-thirds of India's software exports, he said. That is a long-term solution, easier said than done, for an industry that earned 31.4 billion dollars from exports in the year to March, 33 per cent up from the previous year.

Software and related service exports are set to reach 60 billion dollars by 2010, accounting for five percent of economic output and 20 per cent of overall exports, Singh said.

For software firms, the rupee's appreciation reduces the local-currency equivalent of every dollar earned by an export-dependent industry that bills almost all its expenses in the local currency.

"At the end of the day, the US is the IT industry's biggest market and you can't change that," said Harit Shah, industry analyst at Angel Broking in Mumbai. "There's a limit to how much you can reduce your dependence on it."

Software makers have been hedging more of their dollar earnings against a rising local currency in the forward and futures markets, helping them weather the impact of a rupee surge that was not predicted by exporters or economists. They have also signed up more clients and expanded business in the US and elsewhere.

Such moves helped Tata Consultancy, India's biggest software services exporter, boost net profit by 23 per cent to 12.51 billion rupees in the quarter ended September 30.

Infosys, the number two, lifted net profit by 18.4 per cent to 11 billion rupees. Wipro, the third-largest, posted net profit growth of 18 per cent to 8.237 billion rupees. Those firms also benefited as US companies moved work such as IT systems management and software development jobs to India to tap its vast pool of English-speaking, computer-savvy graduates at lower pay than in the United States.

That advantage is being quickly eroded by the rapid appreciation of the rupee, led by a flood of overseas funds into an economy growing nine percent a year, the fastest after China. At Wipro alone, the depreciation of the dollar shaved 15 billion rupees off revenue in the first half.

The Mumbai stock market's benchmark index had surged nearly 45 per cent for the year at Monday's close, led by overseas fund flows of around 18 billion dollars. "The rupee is going to appreciate more as the economy expands - we know that," said Kiran Karnik, president of the National Association of Software and Service Companies, which represents the IT industry.

"We don't expect the government to intervene because exchange rates depend on factors such as US interest rates, oil prices, that are beyond its control," he said. "But the IT industry's problem is that the rupee has risen too much too fast. There is no silver-bullet solution."

AFP

China seeks closer ties with Africa

China's government may have high-profile political and strategic reasons for seeking closer ties with Africa, but its companies are on the continent mostly for the money, analysts say.

A case in point is the move by the Industrial and Commercial Bank of China to buy 20 per cent in South Africa's Standard Bank, which at 5.5 billion dollars is the biggest Chinese financial acquisition ever.

"Chinese companies of course operate as economic entities, and they very much pay attention to the bottom line," said Barry Sautman, an expert on Sino-Africa ties at the Hong Kong University of Science and Technology.

"They're not usually driven by political orders. Instead they are driven by economic opportunities, and the action on the part of this Chinese bank in terms of investing in Standard Bank is driven precisely by that consideration."

China increasingly sees Africa as the land of new opportunity. Bilateral trade was 55.5 billion dollars last year, 10 times the volume of less than a decade ago.

It is against this backdrop that ICBC's surprise deal, announced late last week, makes sense as it gives it access to Standard Bank's comprehensive network of 713 branches in South Africa and 240 in the rest of the continent.

"ICBC's cooperate clients, both large and small, have many investments in Africa. It would be good for ICBC to have a foothold there," said Yukkei Lee, a Hong Kong-based analyst with Core Pacific Yamaichi.

But this is China, and the players are different. It is hard to say where economics ends and politics begins - and ICBC remains majority-owned by the government.

Similarly, it is hard to pin down the primary motive that drove China to sign a deal last month to loan five billion dollars to the Democratic Republic of Congo to develop infrastructure and mining partnerships. "In China it's virtually impossible to truly separate commercial interests from political decisions," said David Marshall, a Hong Kong-based analyst with Fitch Ratings.

"There is extremely close linkage in terms of ownership and personnel between the Chinese large state-owned companies, including the state-owned big banks and the Chinese government. Essentially they are all run by individual senior members of the Communist Party."

AFP

Japan's jobless rate jumps for second straight month

Japan said Tuesday its unemployment rate jumped unexpectedly for a second straight month in September, sparking jitters about the outlook for the labour market, a key pillar of the economy.

Signs of a weakening jobs market will make it even harder for the central bank to justify another interest rate rise any time soon, analysts said.

The unemployment rate increased to 4.0 per cent in September from 3.8 per cent in August, defying market expectations for it to hold steady and rising further away from July's nine-year low of 3.6 percent.

Japan's economy has been steadily recovering from recession in the 1990s but there are concerns about the impact of slowing US growth and tough conditions facing small companies in particular.

The rise in the jobless rate prompted the government to downgrade its assessment of the labour market for the first time in over two years to recognise recent signs of weakness.

Japan's strong labour market has been a key driver of the country's economic recovery from a slump stretching back over a decade.

But the latest rise in the unemployment rate prompted renewed concerns that the job market is losing strength.

"The job market is showing signs of a downturn, especially among small- and mid-sized companies," said Credit Suisse economist Satoru Ogasawara.

Although the jobless rate was worse than expected, financial markets reacted calmly, with the main focus on Wednesday's US interest rate decision.

The Tokyo Nikkei-225 index ended down 0.28 per cent as investors took profits on recent sharp gains, while the dollar slipped to 114.48 yen in Tokyo afternoon trade from 114.60 in New York late on Monday.

The jobless data further reduced expectations of another Japanese interest rate hike any time soon, with the Bank of Japan widely expected to leave its super-low rates on hold at 0.5 percent at a one-day meeting Wednesday.

The central bank is also due to release its latest economic forecasts, which are expected to reflect increased uncertainty about the health of the global economy, as well as a contraction in Japan's economy in the second quarter.

Euro, oil, set to continue record breaking run

The single European currency and oil look set to continue their record-breaking run, driven by a heady mixture of fundamentals and speculative interest, analysts said Monday as both hit historic highs.

The euro touched a record 1.4438 to the dollar early Monday, taking up the slack from a US unit in retreat, with the market betting on more US interest rate cuts as the Federal Reserve tries to offset the fallout from the collapse of the US subprime home loan market.

The Fed cut interest rates by a sharp 50 points to 4.75 per cent in mid-September in a bid to bolster the economy amid concerns the housing slump would undercut consumption and overall growth.

All expectations now, after another series of poor property sector indicators, are that the Fed will cut again by at least 25 points this week.

A rate cut, however, will only likely boost the euro further against the dollar given that China and Japan both appear to determined to keep any gains in the yuan and yen strictly limited to protect their export-driven economies.

The European Union has repeatedly called for Beijing to allow the yuan to appreciate further and faster so as to help ease the massive and growing global imbalances reflected in China's huge trade surplus.

The situation is made worse for the European Central Bank because given its primary task of keeping inflation under control - especially as high oil prices feed through the system - the option of a cut in interest rates is out of the question at the moment, analysts said.

"There has been a pickup in inflation, which will be at least 2.3 per cent, if not 2.4 per cent, in October. The ECB cannot do much about that," said Olivier Gasnier, economist with Societe Generale.

Similarly oil has risen sharply in the past several weeks to well above 90 dollars to the point where many fully expect it to hit 100 dollars shortly. That level would be both a nominal and absolute record, putting it above the equivalent price of the late 1970s.

"Markets like round figures so they are going to push it to that level," said Gasnier of Societe General. Additionally, the weakness of the dollar - in which oil prices are quoted - adds to the pressure on the price as producers seek ever higher levels to offset the currency factor.

Against this backdrop, oil presents a significant trading opportunity for those with the funds to hand, said Pierre Terzian, head of Petrostrategies. "Given the crisis in the US home loan market, there is money looking for a home and while the dollar is falling, the stock market is not going too well and so oil offers the perfect opportunity," Terzian said.

AFP