Heavy inflows of cash from abroad and an accelerating economy are pushing the Indian rupee to its highest levels against the dollar in about four years. If the dollar doesn't rebound vs. the rupee, or if revenue doesn't increase more than expected, currency trends could hurt the red-hot offshore outsourcing sector. "Our fiscal 2005 estimates for leading Indian outsourcing firms could be at risk for a 5% to 10% reduction," said analyst Ashish Thadhani of Brean Murray Research. Because personnel and other expenses paid in rupees make up a different proportion of revenue for the leading outsourcing vendors, the potential hits vary from a too-strong local currency. Cognizant ( CTSH), for example, has an exposure to the rupee of just 20% to 25%, while Infosys' ( INFY) exposure ranges from 30% to 40%. As a rule of thumb, Thadhani said, a 1% appreciation of the rupee could adversely impact net profit margin of leading firms by 20 to 50 basis points. (Brean Murray does not have a banking relationship with the companies mentioned in this story.) Costs and margins are especially critical in outsourcing. After all, low costs are why so many American companies have moved call centers and other operations to India. For example, workers at a call center in Kansas City, a relatively low-cost area by U.S. standards, are paid about $10 an hour. Similar work in Mumbai (formerly Bombay) pays $1.50 an hour. That advantage has cost the U.S. thousands of jobs and ignited a political firestorm that will likely affect the national election. Any fallout from the strong rupee probably won't show up in first-quarter results. It's likely that the outsourcing companies hedged against the weakening dollar during the first three months of the year. But that strategy won't continue to work if the trend continues. "If it keeps up, you don't find anyone on the other side" betting on a weaker rupee, said Howard Simons, president of Rosewood Trading and a contributor to RealMoney.com.