Globalized Services Delivery
INR Depreciation:
Is it Here to Stay? While the USD has now become a safe haven currency, there has been a general trend of depreciation of emerging country currencies
S
overeign debt issues in Europe have again made investors risk averse the world over. The USD has now become a safe haven currency. The impact is being felt in emerging economies as funds are being pulled out of these markets. There has been a general trend of depreciation of emerging country currencies. In so far as Australia is concerned, Indian Rupee (INR) and Philippine Pesos (PHP) are two important currencies from a globalized services delivery perspective—INR as India has a dominant position in services globalization, and PHP as Philippines is now also an important services delivery center, especially for BPO. How these currencies move has an impact on the cost of a globalized service delivery model.
Depreciating Trend
Since August 02, 2011, against the USD, the INR has depreciated 20% and the PHP 5.14%. Against the Australian dollar (AUD), since August 01, 2011, the INR has depreciated by 13.29% and the PHP has actually 44 | February 29, 2012
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appreciated by 0.08%. It’s obvious, the INR has depreciated significantly more than the PHP against both the USD and AUD in the last five months. All things being equal and looking at only currency exchange rates, in USD and AUD terms, the cost of delivering services from India should have become significantly cheaper in the last 5 months. In case of the Philippines, the cost of delivering services in AUD terms would have increased marginally (0.08%) and in USD terms decreased slightly (5.14%). Whether customers actually got the benefits of a depreciating INR depends on a number of factors including the hedging strategy of the customers, their vendors, and offshoring contract provisions with regard to currency movements.
India vis-à-vis the Phillipines
Coming back to exchange rates, while exchange rates between two currencies are determined by interest rate differential, inflation differential, current account deficits/ surplus, public debt, terms of trade, general economic performance, etc, it’s interesting to see how people of Indian and Philippines origin living overseas (outside of India and Philippines, respectively) are impacting their currency movements. India is currently estimated to have a ‘stock’ of around 25 mn+ people living overseas. These people are commonly referred to as Non Resident Indians (NRIs) and account for 2.1% of India’s population. In comparison, Philippines is estimated to have a ‘stock’ of around 9.5+ mn living overseas. These people commonly referred to Overseas Filipinos (OFs) account for 9.4% of the Philippines population. These people living overseas maintain strong links with their parent countries (India and Philippines in this case) and remit a significant DATAQUEST | A CyberMedia Publication
Philippines
India
9.5 mn+
25 mn+
9.4%
2.1%
Estimated Inward Remittance
$21 bn
$55 bn
Ratio of Inward Remittance/Gross Exports of Goods and Services
32.25
14.38
Surplus
Deficit
Number of overseas people Overseas people as a percentage of total population
Whether Current Account is in Surplus or Deficit
amount of money. As per the World Bank figures, remittances by NRIs to India were around $55 bn in 2011 and India was the highest remittance recipient country in the world. India’s gross export of goods and services in FY11 was $382.5 bn, giving it a ratio of Inward Remittances/Export of goods and services of 14.38. In comparison, OFs remittances to Philippines were around $21 bn in 2010 and Philippines was the fourth highest remittance recipient country in the world. Philippines gross export of goods and services was $65.10 bn in FY10, giving it a ratio of Inward Remittance/Export of goods and services of 32.25. While there could be minor differences to the above numbers due to different data sources, the trends are quite clear–Inward Remittances
Whether customers actually got the benefits of a depreciating INR depends on a number of factors including the hedging strategy of the customers, their vendors, and offshoring contract provisions with regard to currency movements visit www.dqindia.com
play an important role in the economy and currency movements of both these countries—the impact is much higher in case of Philippines as compared to India (See Table). Both India and Philippines have well-defined policies to cater to this overseas resident segment—more so as this is a steady and growing stream of inward remittances. No wonder India recently (in December 2011) decontrolled interest rates on NRI deposits resulting in a sharp rise in some NRI deposit rates. Also realizing there may be hesitancy in investing in a depreciating currency, India also recently allowed NRIs to hedge currency risk. So, will it stem the INR exchange rate slide? Financial analysts believe the fall in INR exchange rate has been more sentimental than fundamental. Of course, structural issues being faced by the Indian economy, slower GDP growth (India’s GDP growth is now forecast to grow at around 7% as per India’s PM statement on January 09, 2012) and relatively high inflation rates have also impacted the INR exchange rate in addition to global risk aversion. Interesting to note, how in a flatter world, the cost of delivering services for Australia could potentially be impacted to some extent by people of Indian and Philippines origin living outside their home countries. n (Extracts from services globalization insight by GLOBAL MINDSET) maildqindia@cybermedia.co.in February 29, 2012 | 45