Moneycontrol Pro Panorama | Will US Fed rate cuts reverse slowdown in Indian IT?

US Federal Reserve

Dear Reader,

The prospect of a more rapid rollout of interest rate cuts by the US Federal Reserve, together with Infosys’s proposal to consider a buyback, has driven up IT stocks in Tuesday trading. Financial services, in which interest rates and monetary policy play an important role, is a large business vertical for Indian IT. The argument is that favourable monetary and liquidity conditions will aid the US financial services sector.

However, the recent troubles of Indian IT did not originate from the financial services domain. At the aggregate level, the financial services vertical clocked relatively better growth rates in recent quarters.

The slowdown in the IT industry is attributed to stress and reduced client spending in retail, manufacturing, logistics, and healthcare verticals, apart from Trump-induced uncertainty in the global economy.

AI-led efficiency gains are threatening to compress revenue in the near term and as analysts warn, client IT budgets are seeing increased competition from hyper-scalers and software vendors (software as a service etc).

Latest data from the US indicate continuing challenges in the non-financial services verticals. Hiring has slowed and clients in manufacturing, retail, green energy and housing are reassessing their plans amid tariffs and policy changes.

On the other hand, updates from IT companies indicate no major deceleration in business. The depreciation in the Indian rupee will provide relief. The underperformance of the Nifty IT index over the last one-year, healthy free cash flows and steady payouts by companies enhance the value appeal of these stocks.

Even so, investors should see IT stocks in the context of growth and risks to the business. A pick-up in revenue growth is vital for stock returns. “While historical 5-year valuations look cheap, if one stretches that to 10 years they do not seem so. Especially when FY27 (growth) pick-up may be at risk,” warn analysts at BOB Capital Markets.

The underperformance of IT stocks over the last one year may have set them up for a rebound. Vijay L Bhambwani explains here about a phenomenon of sector rotation, where big money drives up certain stocks for a certain period.

However, retail investors may not always excel in tactical positioning. They would do well to base their investment decisions on data and reliable growth indicators.

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R Sree Ram Moneycontrol Pro