To continue the discussion on the impact of rupee appreciation that was begun by Swaminathan Aiyar a few days ago, the software industry is an interesting test case of the questions of interest. This is because the domestic firms are primarily export oriented. Hence, firm financial data is directly relevant for understanding changing export conditions and their consequences. The software industry is expected to have been hurt both by the slowdown in the US, and by the appreciating rupee.
The CMIE Internet system has interesting data about the aggregated quarterly results of software companies:
|Parameter||Jul-Sep 2006||Jul-Sep 2007|
|Operating profit margin (%)||29.98||28.46|
|Net profit margin (%)||23.49||21.58|
While sales growth has dropped, margins have not yet dropped much. An operating profit margin of 28.46% is still a very large one by any standard - it is roughly ten percentage points bigger than the operating profit margin for non-financial firms as a whole. A glance at this table does not suggest that the INR/USD appreciation of 13.6% from Sep 2006 to Sep 2007 has greatly damaged the situation of these firms.
In understanding what is going on, a key aspect is the role of the exchange rate appreciation as an equilibriating mechanism. With INR/USD at Rs.46 a dollar, the economy was overheating. The INR appreciation has helped deliver more normal conditions on the labour market, in the investment of firms, etc. As an example, see this excellent article by Mobis Philipose in Mint about the responses at Infosys. The appreciation is not a shock which is demanding corresponding adjustments of the economy; it is the mechanism through which the economy adjusts. A distorted exchange rate - like distorted petroleum product prices - yields distorted behaviour on the part of a lot of firms and households. When the government comes in the way of the market exchange rate, it hinders the adjustment process on the part of millions of households and firms.