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CONTENTS

INDO-US TRADE RELATIONS

U.S.A RECESSION AND DOLLAR

DEPRICIATION

- REASONS

EFFECTS OF SINKING DOLLAR ON:

y INDIAN ECONOMY

o GDP

o FDI

o RESERVES

y INDO- U.S TRADE

y SERVICE SECTOR TRADE

y I.T SERVICES

y W IPRO

TOOLS TO COUNTER THE EFFECT

CONCLUSION

BIBLIOGRAPHY

VOTE OF THANKS



INDO-US TRADE RELATIONS

THE PAST

y Economic and trade relations between theUnited States and India have experienced anumber of ups and downs since India¶sindependence in 1947.

y During much of the 1950s and early 1960s, TheUnited States was a leading trading partner forIndia providing the nation with about a third of its imports.

y However, those economic ties quickly subsided when India fostered closer ties with the SovietUnion following the Indo-Pakistani War of 1965.

THE PRESENT

y Since 2004, Washington and New Delhi have been pursuing a ³strategic partnership´ basedon numerous shared values and improved

economic and trade relations.

y India is in the midst of a rapid economicexpansion, and many U.S. companies view India as a lucrative market and a candidate forforeign investment.



y According to official U.S. trade statistics, bilateral merchandise trade with India hasgrown from under $10 billion in 1996 to nearly

$31 billion in 2006

y In 1996,o India was the 32nd largest market for

U.S. exportso The 25th largest source of imports.

y In 2006,o India had risen to be 21st biggest export

marketo The 18th biggest supplier of imports.

The United States¶ total trade with India in 2006exceeded that with Israel, Nigeria, and Thailand.

y On March 2, 2006, President George W. Bushand Indian Prime Minister Manmohan Singhendorsed the goal of doubling bilateral trade inthree years.

y On December 18, 2006,

o President Bush signed into law H.R. 5682,the Henry J. Hyde United States-IndiaPeaceful Atomic Energy Cooperation Act of 2006 (P.L. 109-401), signaling an intent to waive restrictions on civil nuclearcooperation with India.



y India and the United States agree that trade is

essential to promoting global economic growth,

development, freedom and prosperity.

U.S RECESSION AND DOLLAR

DEPRICIATION

CAUSES OF DOLLAR DEPRECIATION

THE IRAQ WAR

y The Iraq-USA war demanded a huge sum of money which resulted in a huge outflow of dollar

as the main target of the US economy was tosupport the war expenses.

y This reduced the buying power of the country interms of other commodities.

y The war had adverse effects on their economy which will require some years to subside.



SUBPRIME CRISIS

y Sub prime loans are loans granted to companies

who have defaulted in the past in terms of repayment of loans.

y The financial companies in the start of thetwentieth century came up with the idea of granting loans at a higher rate of interest to suchdefaulter companies or sub prime companies. Butafter some years these defaulter or sub prime

companies again defaulted which resulted in ahuge loss to big financial companies whicheventually resulted in sub prime crises.

ECONOMIC CYCLE

y Every economy has to go through economic

cycles. In this process every country reaches itspeak and then goes through a recession.

y The US economy completes its economic cycleevery 8-10 years.

y When a country goes through recession the

investors from that country pull out theirinvestments and invest the same in some othergrowing economies.

y When the US was going through recession theinvestors pulled out their investments from the



US and invested their funds in India which is agrowing economy.

y Too much of investment of dollar lead to moresupply of dollar then the demand for dollar whichresulted in depreciation of dollar in comparisonto rupee.

ISSUE OF GOV ERNMENT BONDS

y In order to fund domestic projects as well as wars

overseas, the U.S. Treasury Department issues bonds ± I.O.U.s that anyone can buy now withthe promise of payment in the future.

The buyers of these bonds are nations.

y China has chosen not to spend a large amount of U.S. Dollars it earns from exports, choosing

instead to invest them in these bonds (in other words, China is holding on to U.S. Dollars inreserve in the form of bonds).

y While U.S. Treasury bonds are considered one of the safest types of investment, governments likeChina¶s have become increasingly concerned thatif the United States issues too many bonds, itsdebt will rise to a level at which it will be unableto fulfill future payment obligations.

y China has become hesitant to hold onto moreU.S. Dollars in its reserve, thus increasing the



supply of the Dollar worldwide, and consequently diminishing its value.

y Even if China is confident that the United States will pay its debts, as the value of the dollardeclines, China becomes increasingly tempted toreduce its dollar reserves before they completely lose value.

EFFECTS OF SINKING DOLLAR

INDIAN ECONOMY

y BALANCE OF PAYMENT AND GR OSSDOMESTIC PR ODUCT

The pattern of international tradeadjustment is affected by the continuinginternational role of the dollar and relatedevidence on exchange rate pass-through intoprices.

Depreciation of the dollar would have

asymmetric effects on flows between theUnited States and its trading partners.

The depreciation of dollar has been a majorsource of concern for Indian exporters andIndia¶s Balance of Payments.



India¶s external balance of payments howeverappeared robust. In the net there was far more foreign

exchange flowing into the country than flowing out. As a result, the year 2002 ended with foreignexchange reserves crossing the $70 billion mark Thisfollowed the accretion of as much as $10 billion overthe previous four months and another $10 billion inthe six months prior to that. A part of the increase inreserves is the result of a revaluation of the dollar value of non-dollar foreign currency holdings, as a

result of the depreciation of the dollar against othercurrencies, especially the Euro.But even an overgenerous estimate suggests that overthe period April to September 2002 only about $2.5 billion of the 9 billion dollar reserve accumulation wasthe result of such revaluation. The dollar excess issubstantially due to an excess of inflows over

outflows.

Despite the lack of any concerted effort in recenttimes to mobilize foreign exchange through borrowingagainst bonds and despite indications that both thegovernment and the private sector are retiring andreducing their holding of high cost foreign debt, theRBI has been forced to mop up foreign exchange

inflows to prevent any undue appreciation of therupee.

This could be seen as reflective of the strength of therupee and the growing weakness of the dollar. But



appreciation of the currency in a country that has not been able to trigger any major export explosiondespite ten years of neoliberal economic reform is not

necessarily a good sign.

At given prices, appreciation of a country¶s currency by definition increases the dollar value of exportableand reduces the local currency value of its imports.Inasmuch as this triggers a decrease in aggregateexport earnings and increases the import bill,appreciation can be damaging for the balance of trade.

And since this occurs in India at a time when oilprices are hardening internationally, the rupee¶sappreciation does threaten to widen the balance of trade deficit, or the excess of imports of goods andservices over exports of goods and services.

There are two reasons why this has as yet not given

cause for worry to the government and the central bank. First, the most recent figures on exports pointto some recovery in India¶s export performance. Thusthe dollar value of India¶s exports rose by 15.7 per centduring the first eight months of the current financial year (April-November), which compares well with theperformance during the corresponding period of the

previous year. However, while this may dampenconcerns about the possible damaging effects of exchange rate appreciation, it cannot be heldresponsible for the improvement in India¶s reservesposition. A sharp 21 per cent increase in the dollar



value of oil imports and a unexpected 12 per centincrease in the dollar value of non-oil imports haveactually increased the size of the trade deficit recorded

during the first eight months of this financial year($6247.65 million) as compared with thecorresponding figure for the previous year ($5814.93million).

The second reason why the rupee¶s appreciation hasnot given the government and the central bank causefor concern is the fact that as a result of a $1.3 billion

increase in Private Transfers (largely remittances) anda $1.5 billion increase in net receipts fromMiscellaneous Factor Services (which includessoftware and business services exports), the currentaccount of the balance of payments recorded a surplusof $1.7 billion during April-September 2002-03 ascompared with a deficit of $1.5 billion during the

corresponding months of 2001-02. That is, therelatively new tendency for the current account of the balance of payments to record a surplus noted overthe whole financial years 2001-02, has persisted andgathered strength during the first six months of 2002-03.

Large ³autonomous capital inflows´, occurring at a

time when India¶s requirements of capital inflows tofinance any deficit on the current account have vanished, have played a major role in explainingreserve accumulation. And inasmuch as the easy availability of dollars on account of such inflows have



resulted in an appreciation of the rupee¶s value inIndia¶s liberalized exchange markets, exporters who inthe past preferred to delay repatriation of receipts in

order to benefit from any depreciation of the rupeehave been keen on bringing back their dollar receiptsin order not to loose out on the rupee value of receipts because of the appreciation of the domestic currency.Such delayed repatriation of exports receipts getincluded according the RBI under the ³errors andomissions´ head.

Thus when we breakdown dollar receipts by source, it becomes clear that the robust balance of paymentsposition as indicated by reserve accumulation andcurrency appreciation are largely due to autonomousflows from abroad. Those autonomous flows result ina tendency towards currency appreciation, which hasa peculiar effect on export receipts. In the short run by

encouraging the quick repatriation of past and currentexport receipts rupee appreciation increases suchreceipts. But in the medium and long-term, by raisingthe unit dollar value of India¶s exports it affects exportrevenues adversely.

RESER V ES

y We hold about $160 billion in foreign currency reserves. Most of it is reportedly in US dollar-denominated assets.



y The dollar has fallen by 23 per cent in trade- weighted exchange rate items since February 2002.

y This translates into a fall in the value of ourcurrency assets by 23 per cent.

y The country has suffered a potential loss of wealth of around $32 billion.

y In rupee terms the country has lost Rs 144,000-160,000 crore.

EFFECT OF SINKING DOLLAR ON INDO~USTRA DE

The Indian textile industry has been hard hit the

appreciation of the rupee to the extent of 15% over theperiod of the last one year.

Trade in clothing and textiles is a major issue in U.S.relations with India/

Clothing and textiles are among the top five Indiaexports to the United States.



Between July 1, 2006, and March 1, 2007, the value of the Indian rupee gained 4% against the U.S. dollar, as

the exchange rate declined from 46.126 rupees perU.S. dollar to 44.287 rupees per U.S. dollar.

However, over the next two months, thestrengthening of the rupee accelerated, so that by themiddle of July, the exchange rate stood at 40.423rupees per dollar ² or an appreciation of 9.1% in less

than four months.

Textile Industry, said that the slowdown in U.S.demand along with the strengthening of the rupee arecausing serious harm to India¶s clothing and textileindustry.



A large numbers of workers have already lost jobs inthe process and the situation is worsening week after week.

Jewelry India is a leading exporter of jewelry, especially diamonds and diamond jewelry, to the world and tothe United States

In 2006, the United States imported $5.9 billion worth of jewelry from India, or 25.5% of all importsfrom India.

The shining Indian diamond exports to the UnitedStates are on the decline and have left many traders inthis sector worrying.

Among the major reasons cited for this slowdown inthe Indian diamond exports to the United Statesexperts say that the slowdown in the US and the rising value of the Indian rupee are major reasons for thedecline.



The decline in the exports began to be seen from July of 07 when the United States removed exemptions oncustoms duty for the Indian jewellery products.

Another reason cited for the decline in Indiandiamond exports to the United States according to TPGopalakrishnan who is the executive secretary of SEEPZ Gems and Jewellery Manufacturers Association is that people in the US are now stayingaway from gifting diamond studded jewellery.

Since in the US culture, diamond studded jewellery isused as gifts which is the reason of India¶s diamondexports growth.

People in the United States now seem to be savingmoney for difficult times and hence, the Indiandiamond export to the United States is recording adecline.

The US market is the major market for the Indiandiamond industry and any change in the habits of thepeople is bound to impact the Indian diamond sector.Gopalakrishnan also stated that the US market for theIndian diamond industry is amounts to 34% whencompared with other markets of the world for theIndian diamond exports.

BPO & IT



The Indian rupee has significant strengthened overthe last year against the U.S. dollar, falling from 45rupees to 39 rupees per dollar.

This huge strengthening of 13 percent coupled withsignificant pay increases has shaved part of the Indiancost advantage.

The IT sector will be the worst hit as 75 per cent of itsrevenues come from the US.

The rupee appreciation impacts BPO companies

more than it does IT companies.

A one percent rise in the value of the rupee against thedollar has a 75 to 80 basis points impact on theoperating margins for BPO companies, unlike ITcompanies where the impact is about 40 basis points.

According to the chairman of a leading Indian IT

company, depreciation of the dollar is emerging as the biggest risk for the Indian software and IT-enabledcompanies as their exposure in the US currency ismore than 80%.

Infosys Technologies, India's premier IT giant, lost$21.6 million on account of the rupee's appreciationagainst the US dollar.

A majority of IT companies and BPOs in India cater to American clients and measure revenue in dollars.

As a study puts it, "Indian software firms get 60 percent of their revenues from the US and a one per cent



appreciation of the rupee against the dollar canimpact earnings before interest and tax margins by between 30 and 50 basis points.

The operating margins in the BPO industry areusually around 12% and the rupee rise is expected tohave a 9% impact on BPO margins. The expenses forBPOs incurred in rupees also add to this situation.

India's own booming economy and expanding foreignreserves are, ironically, contributing to this crunch.

Rupee appreciation and wage inflation has alsoprompted the ITES-BPO industry to make a strongpitch to the Indian Government for the continuationof tax concessions under the Software Technology Parks of India (STPI) scheme beyond 2009.

Extension of tax incentives can help the industry counteract losses being caused by the dollar dip.

The rupee's appreciation against the dollar hasclaimed its first victim in the business processoutsourcing space.

US-based Spectrum Global Fund Administration thatprovides back-office operations to hedge funds in theU.S. and the U.K. is closing its facilities in India. The

company had started its operations there only two years ago.

In an effort to combat these threats, large IT and BPO firms have started looking at other markets like



Europe, and even the domestic market, to spread theirrisks and reduce the impact of the rising rupee.

Indian outsourcing giants in the technology sector,

such as Tata Consultancy Services, Wipro and InfosysTechnologies, are hedging their bets by expanding incountries such as China where costs are lower.

Some of the strategies include hiring freshers andstudents with non-engineering backgrounds, andimproving the business mix to increase productivity to beat the heat of the rising salaries.

Industry analysts believe that with these strategies,coupled with an indexed wage differential, the IT-BPO firms should be able to retain their competitive edgein outsourcing for at least another 10-15 years.

The currency appreciation of major outsourcingdestinations is indeed a cause of concern and isexpected to erode the attractiveness of thesedestinations as a preferred outsourcing destination.

The currency appreciation, coupled with wageinflation in many of these destinations, has already started taking its toll on both large and small playersin IT and BPO industries.

Leading companies in these nations have already started establishing new centers in nations where wage growth is still under control and currency movements are relatively stable.



Although countries like India still hold an advantageover others, the forecasted trend of the weakeningdollar and spiraling salaries does not provide a good

picture for these outsourcing destinations.

EFFECT OF SINKING DOLLAR ON SER V ICESECTOR

y The service sector of Indian Economy has brought much success in the recent years. Itconstitutes a larger share in the total GrossDomestic Product.

y The growth rate of services sector in India isfaster than any other sectors. It constitutes

more than 50 percent of the total GDP in thecountry.

y Service sector accounts more than half of India's Gross Domestic Product. The rise inservice sector's share in GDP marks astructural change. Reason for high growth ratein service sector in India is liberalization in

regulatory framework.y Indian service sector, which rose when the

rupee depreciated in the early 90's from 25 to45, is now facing the challenges of appreciating.



y Currency experts say the Indian rupee, that hasappreciated about 12% against the dollar in2007, will continue to rise against the dollar in

2008 but move in the 38-41.y Depreciation of the dollar is emerging as the

biggest risk for the Indian service industries astheir exposure in the US currency is more than80%.

y A majority of IT companies and BPOs in Indiacater to American clients and measure revenuein dollars.

y Revenues are increasing but profits are gettingsqueezed and growth of the overall sector isexpected to be slowing down to some extent but not in a big way.

y It companies are decreasing their exposure tothe US market by focusing on Europe and Australia also, Satyam US revenues have come

down to approx 50% level, so are othercompanies trying.

y Companies are trying to move up the valuechain through consulting and making productsalso and decreasing the bench strength andproviding more training.

EFFECT OF SINKING DOLLAR ON I.T SECTOR



The US accounts for two-thirds of Indian softwaresales, and any rise in the rupee will trims profitmargins.Foreign direct investment nearly tripled in

the year to $16 bln US$ from $5.5 bln a year earlier.Net foreign-exchange earnings make up around 51%of sales of IT companies. IT companies, while billingin dollars, are not import-intensive, unlike jewelry makers who buy raw material such as gems and uncutdiamonds from abroad to polish and fashion intoornaments. All the expenditures of IT companies are

in rupees so they are very much affected.Many big information technology companies arelowering their revenue targets as well as growth rateexpectations going by the current rate of Dollardepreciation. In fact this the Rupee has gained by 8percent, hitting a nine-year high this year.If this trendcontinues for a longer period, it will affect the bottom

line of many outsourcing companies in a negative way. Minister of Commerce and Industry,Government of India, had written a letter to the PrimeMinister stating its concern about the impact of thison the service exporters in the country. On therecommendations of the government of India RBI has bought $ 19.7 billion in the last four months in a bidto curb Dollar depreciation against the Rupee.

The exports have started to get hurt by this trend. According to market reports total Indian exports haveslowed down to 8.8 percent at $12.58 billion in Marchthis year. According to ministry of commerce, the



country is aiming at a $160 billion by March2008.The BPO industry is expected to grow at about37 percent each year till 2010, but this rising rupee

may mean reworking some revenue targets. According to Nassocm Mckinsey predictions the BPO market will show the steady growth rate and clock in arevenue of $55 billion by 2010, contributing about 45percent of the total services exports from the country.

INFOSYS

Depreciation of the dollar is emerging as the biggestrisk for the Indian software and IT-enabledcompanies as their exposure in the US currency ismore than 80 per cent.

A further depreciation of 10 to15 per cent will

significantly erode the labour cost arbitrage of Indiancompanies which is the main business driver, whileprofit margins are already under pressure due to wagerevisions and an increase in visa costs.



Despite registering a 34.6 per cent growth in profits toRs 1,070 crore in the first quarter, InfosysTechnologies, the darling of Indian and global

investors, has lowered its revenue guidance by oversix per cent for the current financial year ending(2007-08) from what it projected in April. The ITmajor has been forced to lower its revenue guidancedue to the record 6.2 per cent appreciation of therupee during the first quarter (April-June), wagerevision and higher visa costs. The sharp appreciationsqueezed the firm¶s operating margin by 3.5

percentage points.

The impact of the rupee appreciation and an expectedreduction in the guidance is factored into Indian ITstock prices after the recent downs. The sharp rupeeappreciation during the quarter may lead to ITcompanies missing their revenue and earning-per-share guidance for the quarter in rupee terms despite

strong quarter-on-quarter growth in US dollar terms.

Despite strong quarter-on-quarter growth by IndianIT companies, analysts believe that the operatingprofit margin may decline between 50 to 260 basispoints for Tier I companies such as Infosys, TCS and Wipro. However, the net impact may be mitigated tosome extent by extent of gains on hedging in forextransactions.



TOOLS TO COUNTER THE EFFECTS

Hedging is a strategy designed to minimize exposureto an unwanted business risk, while still allowing the business to profit from an investment activity.Typically, a hedger might invest in a security that he

believes is under-priced relative to its "fair value", andcombine this with a short sale of a related security orsecurities. Thus the hedger is indifferent to themovements of the market as a whole, and is interestedonly in the performance of the 'under-priced' security relative to the hedge.

Some form of risk taking is inherent to any business

activity. Some risks are considered to be "natural" tospecific businesses, such as the risk of oil pricesincreasing or decreasing is natural to oil drilling andrefining firms. Other forms of risk are not wanted, butcannot be avoided without hedging.



For example, a producer that exports to anothercountry may hedge its currency risk when selling by linking its expenses to the desired currency. . Banks

and other financial institutions use hedging to controltheir asset-liability mismatches, such as the maturity matches between long, fixed-rate loans and short-term (implicitly variable-rate) deposits.

Why do companies hedge?One reason why companies attempt to hedge the price

changes is because they are risks that are peripheral tothe central business in which they operate.By hedging, in the general sense, we can imagine thecompany entering into a transaction whose sensitivity to movements in financial prices offsets the sensitivity of their core business to such changes. Another reason for hedging the exposure of the firm

to its financial price risk is to improve or maintain thecompetitiveness of the firm. Companies do not exist inisolation. They compete with other domesticcompanies in their sector and with companies locatedin other countries that produce similar goods for salein the global marketplace.

Heading currency risk Currency hedging (also known as ForeignExchange Risk hedging) is used both by financial



investors to parse out the risks they encounter when investing abroad, as well as by non-financial actors in the global economy for whom

multi-currency activities are a necessary evilrather than a desired state of exposure.If the cost of manufacturing goods in anothercountry is denominated in a currency other thanthe one that the finished goods will be sold for,there is the risk that changes in the values of eachcurrency will reduce profit or produces a loss.Currency hedging is akin to insurance that limits

the impact of foreign exchange risk.Currency hedging is not always available, but isreadily found at least in the major currencies of the world economy, the growing list of whichqualify as major liquid markets beginning withthe "Major Eight" (USD, GBP, EUR, JPY, CHF,HK D, AUD, CA D), which are also called the

"Benchmark Currencies", and expands to includeseveral others by virtue of liquidity.Currency hedging, like many other forms of financial hedging, can be done in two primary ways: with standardized contracts, or withcustomized contract.The financial investor may be a hedge fund thatdecides to invest in a company in, for example,

Brazil, but does not want to necessarily invest inthe Brazilian currency. The hedge fund canseparate out the credit risk (i.e. the risk of thecompany defaulting), from the currency risk of the Brazilian Real by "hedging" out the currency



risk. In effect, this means that the investment iseffectively a USD investment, in Brazil. Hedgingallows the investor to transfer the currency risk to

someone else, who wants to take up a position inthe currency. The hedge fund has to pay thisother investor to take on the currency exposure,similar to insuring against other types of events.

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