IT

The IT stocks behavior in the recent turmoil of the sensex have been very interesting. Before getting into the discussion I want to expand on few terms here

Rupee appreciation: In the recent times the huge amounts capital inflows into our country in the form of FDI and FII have led to an excess demand of the rupee in the exchange market. This led to the appreciation of rupee. If a currency appreciates its purchasing power increases and so our imports become cheaper, but at the same time exports become more costly.

Exchange market intervention: Countries like china and India which depend a lot on its exports wouldn’t want its currency appreciation to affect the exports. So, the central bank of India would sell more rupees in the foreign exchange market and buy dollars. This increase in supply of rupees will negate the increase in demand for the rupee keeping the currency stable.

But, because of inflation concerns in the recent times the central bank of India stopped intervening(stopped buying dollars) in the exchange market letting the rupee appreciate based on market forces.

Appreciation of rupee will affect domestic industries which solely depend on their exports like textile industries, IT and other service industries. The revenue earned by the IT industries will decrease when converted to rupees. Simple example, suppose a company X normally earns 50$ per project and say the exchange rate is 50 rupees per dollar today. So the income for the company is 2500 rupees per project. Now, the currency has appreciated to 40 rupees per dollar, the income of the company will decrease to 2000 rupees per project. So, the profit margins of IT companies come down and based on these concerns their market price in the stock market will decrease.

The behavior of IT stocks with respect to the sensex recently was affected by some of these factors, more and more foreign institutional investors (FIIs) started investing in the Indian stock markets leading to more demand of rupee in the exchange market. So, rupee started appreciating.

Now the sensex was soaring up because huge amounts of FIIs being invested. But the rupee appreciating led concerns have affected the IT stocks.

More FIIs = Sensex soaring high = more of rupee appreciation = IT stocks not performing well.

Everything was going fine until the sub prime mortgage crisis started raising concerns throughout the world markets. So, FIIs started pulling back all their money from Indian markets, so naturally the rupee has to now depreciate. And a normal guess would be the Sensex goes down and IT stocks go up. But, this is not completely true; instead IT stocks also started plunging down along with Sensex. The reason is simple, people expected the US to go into an economic recession after the sub prime crisis. And 50% of the projects of the Indian IT companies come from US. The economic recession in US, if happens, will have much more devastating effect on the Indian IT industries.

A few days back on 18^th September the discount rates in US were cut down by good enough margins to mitigate the concerns over mortgage crisis. So, naturally FIIs started flowing into upcoming Asian markets like India again. On 19^th September you saw the Sensex reaching an all time high. Again more FIIs will lead to appreciation of rupee. So, on 20^th September rupee reached a nine year high value. Even though the Sensex has been reaching new heights the IT stocks are not the major gainers in this race. The reason being simple, Rupee appreciation.

So the IT stocks after the long bull run in the past years have come to a stop regardless of whether the Sensex is on a bull run or bear one.