The volatility in the foreign exchange rate appears to be the biggest threat to India Inc's growth prospects in the coming years, say chief financial officers (CFOs) across companies in the country.
According to the fifth annual American Express CFO Research Global Business and Spending Monitor, a survey of 541 senior finance executives from the US, Europe, Canada, Latin America, Asia and Australia, 45 per cent of India-based finance officials considered the exchange rate instability as a major concern.
The rupee depreciated against the dollar by about 18 per cent in less than six months — between August 5, 2011, and December 15, 2011 — with the volatility almost doubling from five per cent to 12 per cent in this period, the Reserve Bank of India (RBI) data showed.
On December 15, the rupee touched an all-time low of 54.30 per dollar, prompting the central bank to announce a slew of measures. While the steps taken aided the currency to recoup some of its losses earlier this calendar year, the rupee has started weakening again in the past few weeks. Between January, 2011 and April 2012, the rupee was the worst performing currency in Asia, having depreciated by over 18 per cent.
“The weakening rupee, high production input prices, a sharp increase in borrowing costs, and geo-political situations leading to fluctuating oil prices and high inflation are some of the factors influencing the confidence level of Indian finance executives,” said Manoj Adlakha, vice-president and country head of global corporate payments at American Express in India.
Indian CFOs also said changing interest rates, rising volatility in capital markets and restricted access to funding are other concerns for domestic companies.
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“However, we see Indian finance executives expressing far higher optimism for growth and with the overriding belief that they will see a quick recovery,” Adlakha said.
The survey said the outlook for economic growth over the next 12 months was brightest in India, with 86 per cent of India-based respondents expressing optimism. In addition, three-quarters of the CFOs surveyed here have set more aggressive growth targets in 2012. About 91 per cent of senior finance executives in India said they were confident about meeting their growth targets.
They said their growth prospects would be more dependent on domestic sales than on exports over the next two years. Also, nearly half of Indian CFOs were not keen to tap their cash reserves over the next year.
If cash reserves are used it would be mostly for funding ongoing operations or to finance acquisitions and expand operations.
A majority of Indian respondents also said spends on business travels were likely to rise in 2012. "Business travel is a key enabler for companies in India and keeping in view the current economic environment, it is important that finance executives closely monitor their cost optimisation. Our research suggests that when companies see a positive return on investment from travel, they will continue to spend on it," Adlakha said.