How the IT Sector in India Affects the Rupee
If you have ever wondered what factors influence the Indian rupee, then you need to start by finding out how the country makes money. In recent years, the information technology (IT) industry has played an even-more important part in this respect. So, how large a role does IT play in defining the value of the rupee?
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How the IT Industry Has Grown
The IT industry accounted for just over 1% of the total Indian gross domestic product (GDP) in 1998, but had grown close to 8% of the total by 2017, and is still growing. More recent figures show that the IT sector was worth some US$180 billion in 2019, with export revenue making up the greatest part.
Almost 4.5 million Indians work in IT, so it is a major source of employment as well as income. With much of the revenue coming from the US and other foreign countries, this is a way of bringing in external cash to the country and increasing the GDP.
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How the Value of the Rupee Affects IT Companies
A weak rupee helps those companies that export goods or services, as they become more affordable for other nations to use.
It was reported in 2018 that companies offering IT services could profit by as much as 100 basis points thanks to the rupee sliding against the US dollar. A separate report at that time pointed out that a 1% decline in the value of the rupee can lead to a 0.3% increase in earnings for the Nifty 50 benchmark.
On the other hand, as the rupee rises it becomes more difficult for IT companies to sell their services abroad, as they become a more expensive option. Major Indian IT companies use hedging policies to ensure that their profits aren’t harmed by the fluctuating value of the rupee.
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What Effect Does the IT Industry Have on the Rupee?
A variety of factors influence the relative strength of any country’s national currency. These include the current monetary policies, foreign investment in the country and whether there is a trade deficit or surplus. The size of the IT industry in India means that it makes up a large amount of the country’s overall performance.
Since such a large percentage of the Indian IT industry is aimed at exporting services, it is important in determining the country’s overall trade deficit or surplus. A country is in trade deficit if it imports more than it exports, but will be in surplus if the opposite is the case.
As the IT industry grows and more services are sold to customers around the world, this generally has a positive effect on the economy. A country with a trade surplus should create more employment and have a strong economy. In this case, the national currency also grows stronger, as it becomes more in demand. Therefore, the success of Indian IT companies helps to strengthen the rupee, even though those same businesses would benefit from having a weaker currency.
Movements in the rupee can lead to profits on investments made on the foreign exchange (forex) market. So, a company that runs the risk of losing money if the rupee rises may decide to invest in this way as part of its hedging policy. Comparison lists showing the differences between different currency trading brokers shows just some of the ways that investors look to profit from changing currency values and volatile markets. This includes the ability to use the leverage of up to 1:30 on dozens on different currency pairs such as the rupee against the dollar or the euro.
Naturally, this is a simplified explanation of the international currency markets. After all, the US has long had the world’s biggest trade deficit by far, yet remains a leading economy with a powerful currency. We also saw in 2019 that rising crude oil prices and foreign fund outflows combined to cause the rupee to slide against the dollar.
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Summing Up the Relationship Between IT and the Rupee
The IT sector in India is now a massively important part of the country’s economy. As such, it plays an important role in the nation’s economy and helps to define the value of the rupee. However, the complex nature of international markets means that this relationship isn’t as straightforward as you might think.
