In December 2003, the rupee traded at 45.5 to the US dollar. This week, the greenback dipped to Rs 43.65 before staging a small recovery to hover above 44.

The consensus is that the rupee will strengthen further against the USD. This is a global trend. During 2004, the Euro has risen 14 per cent versus USD. Mark "Dr Doom" Faber says the dollar could fall 20 per cent more and he has a nasty habit of being correct at his gloomiest.

The dollar's weakness and the dependency of Indian IT on North America has already had an impact on Dalal Street. IT shares have turned bearish during the recent bull-run, as investors absorbed this macro-information.

If it wasn't for currency exposure, the prospects for IT/ BPO would be excellent. Most IT companies have issued guidance of 30 per cent-plus growth in the 2005.

Business process outsourcing companies are hoping for closer to 50 per cent growth. That's in dollar terms. As the dollar depreciates, growth evaporates.

The Reserve Bank of India has a relatively easy job protecting its $125-odd billion forex kitty -- it can hold Euro or Yen-denominated assets. In fact, the Central Bank has already started to diversify away from US government T-Bills.

The IT industry cannot shift that easily from America. Those markets produce nearly three-fourths of IT revenues and more than 80 per cent of BPO revenues.

Apart from conversion ratios, dropping dollar values will lead inevitably to margin erosion -- US clients will look to cut costs as the currency weakens.

What's the breaking point? According to an internal assessment by the BPO division of an IT major, at Rs 37 (per dollar), profit margins vanish. At Rs 35, companies will close down. If Dr Doom is right, a big shakeout is likely.

It sounds amazing but a sliding dollar could send yesterday's stars into decline with a suddenness that mirrors their dramatic emergence in the 1990s. This is outside the bounds of normal business cycles. The key factors: Nobody knows how far the dollar will fall and nobody knows how badly a falling dollar will dent confidence.

If one is looking for survivors in the aftermath, I guess the logical thing is to look for non-US volumes. Most Indian IT companies will send European operations into overdrive and look for non-USD business in Asia Pacific.

At the same time, they will try to cut costs. They may also try and exploit lower US prices to garner inorganic growth through US acquisitions.

Industry bellwether Infosys encapsulates all these trends. In fiscal 2004, Infosys logged over Rs 4,700 crore (Rs 47 billion) in revenues with net profits of about Rs 1,400 crore (Rs 14 billion).

But 98 per cent of those revenues came from exports and 71 per cent came from the US with 19 per cent from Europe. The geographical breakup is better than in 2003 when the US: Europe ratio was 73:17.

What happens if an anticipated FY 2005 revenue growth rate of 40 per cent is discounted by a 20 per cent fall in the USD?