Will Janet Yellen rescue India's tech majors from margin squeeze?

Technology majors have had a good year due to a weak rupee and a pick up in demand for their products and services in Europe and US. A depreciating rupee has enabled local software-service providers to chase deals at competitive prices as this makes their goods and services cheaper for overseas buyers in dollar terms.

Rising revenues, both on the basis of sales volumes and favourable dollar-rupee conversion rates, drove the share valuations of tech biggies TCS, Infosys, Wipro and HCL Tech to stratospheric levels. The IT sector earns around $60 billion a year from the export of software and services.

[caption id="attachment_1223637" align="alignleft" width="380"] Representational Image. Reuters.[/caption]

Will the joy ride continue in 2014? The answer is yes and no. Yes, if the rupee remains weak and the US Fed starts its much-delayed taper - a reduction in its bond buying programme which is pumping money into the economy. The answer could be no if competition for services gets hotter.

More from Business

According to a report in Business Line, about $114 billion of IT services contracts will have to be renewed in 2014. Some 1,316 commercial contracts will expire next year, and this means the incumbents will have to lower their bids in order to retain their existing deals.

"Most clients who believe they are getting quality service at a fair price will renew their agreements with the incumbent service providers. However, as their governance and service integration processes continue to mature, clients are more willing to reconsider other service providers if they feel they are paying too much or are unhappy with their provider," the report said.

So the fortunes of IT majors will depend on what Janet Yellen, the next US Fed Chairman, does, and whether the big tech majors can cling on to their existing deals without major price cuts. But there's little doubt margins will continue to be under pressure. The big question is on the rupee's direction. Only Yellen has the answer tothat.