The Indian component industry has been going through some anxious moments recently with the strengthening of the rupee (a bit) and the weakening of the dollar (a lot). The Rupee is currently hovering around INR41/US$1, down by around 10% from a year back. This is bad new for the auto component industry, particularly companies like Rico Auto who have a high exposure with the US based carmakers.

While a 10% strengthening of the rupee is something that companies can live with by tightening their belts and removing the inefficiencies in their systems, a recent forecast that landed on my desk spells even tougher times for the component industry. Leading financial institutions forecast that the Rupee will strengthen even more from the existing levels. Most FIs forecast that the Rupee will strengthen to INR38/ US$1 - INR39 / US$1 levels by the first quarter of FY 2009, The optimistic of the lot forecast the Rupee to be at INR 42/ US$1 levels – definitely levels that the Indian supplier base can live with but it is the pessimists that they have to worry about. BNP Paribas forecasts the Rupee to hit INR32/US$1 in the first quarter of FY 2009. The only solace is that there is a big gap between BNP Paribas' forecast and other's so we can expect (hope?) some flaws in BNP's forecast. The next most pessimistic (or should we say optimistic since the Rupee is strengthening) is Morgan Stanley which forecasts the Rupee to be at INR 37.5/US$1.   

Even assuming the Rupee to be at INR38/US$1 levels in the next one year will mean a challenging time for the supplier industry. A senior industry executive pointed out to me a few days back that increasingly more and more new export contracts are having currency fluctuation clauses built in and the amount of fluctuations being accounted for are on the increase. He did not rule out that companies may be forced to renegotiate existing supply contracts with US OEMs and Tier 1s if the situation worsens.  

What is important to note is that it is not the Rupee which is strengthening so much but it's the American Dollar which is weakening. This situation may actually influence Indian suppliers to actively pursue contracts in Europe and elsewhere as compared to the US.