The rise in value of the Indian rupee, while a signal of the increasing strength of India’s economy and potential boon for the general population, is being treated as bad news by Indian outsourcing providers and their customers. So far this year, rupee appreciation has eroded about 11 percent of the dollar’s purchasing power in India, impacting Indian IT services providers, who make an average of two-thirds of their revenue in U.S. dollars but incur more than half their costs in rupees.

The inflow of dollars to India is at an all-time high, creating a surplus, says Sumeet Salwan, director of supplier relations for offshore outsourcing advisory neoIT. As of Oct. 1, 2007, one U.S. dollar was worth 39.65 Indian rupees, more than 10 percent less than its worth (45.79 rupees) a year ago. And experts do not expect the Reserve Bank of India to do much more to stem rupee appreciation because of inflation fears. To put the currency situation in historical context, the dollar hasn’t dipped this much against the rupee since 1996. The dollar’s fall is part of a larger trend of dollar weakness against a host of currencies around the globe.

Offshore vendors in India specifically are struggling to find ways to counter the currency imbalance. The rising rupee is hitting midsize Indian providers—such as Syntel, Polaris, Mastek and iGate—the hardest because their margins are much slimmer than those of the bigger Indian outsourcers. “Losing 3 or 4 percent from 25 percent profits is one thing,” says says Sudin Apte, Forrester Research analyst and country manager for India. “Losing 3 to 4 percent from 9 or 10 percent profitability is another.”

For the first time, some vendors are coping by charging non-U.S. customers in their local currencies rather than in U.S. dollars. IGate, for example, is billing Japanese customers in yen, Swiss customers in Swiss francs and Canadian customers in Canadian dollars, although it still garners the majority of its revenues in U.S. dollars.

Many providers, including Infosys, Wipro, and Satyam, have also worked to improve their employee utilization rates—the average percentage of employees who are billable. “As people move on and off of projects, there is a natural ‘waste’ that occurs,” says Dean Davison, vice president of research for neoIT. “It is considered very good to be 80 percent utilized.” Major Indian vendors have announced utilization improvements of 1 to 4 percent, and Davison expects more improvement in this area.