India should manage its currency to reduce volatility like China guides its yuan exchange rate, Infosys Ltd.’s Chief Financial Officer V. Balakrishnan said, after the rupee today extended losses to a two-year low.
The Reserve Bank of India should “step in at appropriate times,” the executive in charge of hedging at the nation’s second-biggest software exporter said in an e-mail response to a query. The rupee has slumped 11 percent this year, the worst performance among Asia’s 10 most-traded currencies, compared with a 3.2 percent gain in the yuan.
An inflation rate that has stayed untamed even after 12 interest-rate increases since March, 2010, nine quarters of current-account deficit and a prolonged debt crisis in Europe have caused the rupee to tumble this year. The fluctuation erodes profitability at Infosys, which will have $742 million of its revenue covered by risk-mitigating currency derivatives by the end of December, according to Bangalore-based Balakrishnan.
“Rupee’s depreciation at such extreme levels is not desirable when the Indian economy is going through slower growth due to high inflation,” he said. “India should learn to manage its currency like China.”
The rupee fell 0.8 percent to 50.2075 against the dollar at 1:16 p.m. in Mumbai, according to data compiled by Bloomberg. It touched 50.2125 earlier today, the lowest since April 2009.
Infosys has the lowest foreign-exchange cover among India’s three biggest information technology companies, wrote Bhuvnesh Singh, an analyst at Barclays Capital in Mumbai, in an Oct. 18 report. The company hedges 40 percent of its revenue, compared with bigger rival Tata Consultancy Services Ltd., which protects 80 percent of its sales, and No. 3 Wipro Ltd., which covers about 110 percent, the report said.
A stronger currency makes products more expensive for overseas buyers, reducing demand, while weakness boosts revenue when the company repatriates earnings. Every 1 percent movement in the Indian rupee against the U.S. dollar has an impact of approximately 50 basis points on Infosys’s operating margin, the company said in its annual report.
Infosys derived 65 percent of its revenue from companies in North America and 22 percent from Europe in the year ended March 31. The code writer that counts BP Plc and Neiman Marcus Group Inc. among its clients reported a 10 percent increase in net profit in the quarter ended Sept. 30, beating estimates.
The People’s Bank of China sets a daily reference rate for the yuan and allows it to trade up to 0.5 percent on either side, a policy that has invited criticism from U.S. officials including Federal Reserve Chairman Ben S. Bernanke. Failure to allow faster gains against the dollar has impeded a global shift in demand toward emerging markets that would bolster the global economy, according to him.
The yuan has appreciated 10 percent, adjusted for inflation, since mid-2010, a pace that’s too slow, U.S. Treasury Secretary Timothy F. Geithner said on Oct. 11. In contrast, he wrote in a guest column in India’s Hindustan Times in November, that India is demonstrating economic “dynamism” that comes from promoting internal growth, while allowing currency flexibility.
India’s rupee is headed for a third monthly loss as a government report on Aug. 30 showed the gross domestic product grew 7.7 percent in the three months ended June 30, the slowest pace in six quarters. Another report showed factory output expanded at the slowest pace in 29 months in August.
The central bank has boosted its benchmark rate by 3.5 percentage points since March 2010 as wholesale-price inflation stayed above 9 percent for 10 straight months through September.
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