Fed rate cut, trade talks ease downside risk for Indian IT, but tech budgets still locked

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The US Federal Reserve’s 25-basis-point rate cut and constructive tone on India-US trade are being seen as sentiment positives for the $280-billion Indian IT services industry. However, analysts caution the moves won’t unlock tech budgets in the near term.

The consensus is that a cut was already factored in and serves more to reduce downside risks than to spur spending.

“Negativity has reduced, not that positivity has improved,” Abhishek Singh, Partner at Everest Group, told Moneycontrol. Adding that the real unlock for discretionary IT budgets depends on the pace and momentum of further cuts.

On September 17, the central bank of the world's largest economy announced its first interest rate cut since December 2024, reducing the federal funds rate by 25 basis points to a range of 4-4.25 percent. The decision, widely anticipated by markets, comes against the backdrop of a slowing labour market and persistent inflationary pressures.

As a result of the rate cut, money is cheaper in the US, which can boost business confidence and reduce hesitation around spending. For IT firms, that means clients may be a little more willing to sign deals, especially if they see clear returns from investing in technology.

This also assumes significance as the outsourcing sector is grappling with multiple headwinds, including shrinking discretionary spending and tariff-related pressures. As a result, India’s largest export contributor has been pushed to a two-year low, single-digit growth in FY25, Moneycontrol reported earlier.

Also, read: Top 5 IT companies post single-digit growth for second consecutive fiscal amid macro headwinds

What changes now

Lower rates won’t automatically speed up deal-making, Singh said. Nevertheless, firms with deep pockets, such as Infosys, TCS, and Wipro, can sweeten the deal by offering flexible payments, outcome-based pricing, or covering upfront costs to push hesitant clients.

Pareekh Jain, CEO of EIIR Trend, believes that markets now expect at least five more cuts over the next 18 months. Removing uncertainty itself, he argued, gives impetus: signed deals will continue without pause, plugging recent “leakage” in revenues. "That could pave the way for AI-led and digital transformation spending by late FY26."

The Fed’s move is not a magic switch, according to Phil Fersht, CEO of HFS Research. "Budgets will only open when CEOs see growth visibility and tangible ROI."

The subsequent course of action would be a gradual thaw, with backlog conversions moving first, followed by new programs after sustained policy easing.

Deals tied to AI augmentation, cloud cost optimization, and data modernization are best placed to accelerate.

What doesn’t change

Despite trade talk positivity, Singh and Fersht agreed that US federal contracts remain elusive.

Compliance hurdles and onshore delivery requirements mean Indian firms can only hope to participate via US subsidiaries, acquisitions, or teaming with incumbents.

Prashant Yadav, partner for digital and technology at Amrop India, said the bigger drag on IT spending is economic uncertainty rather than profitability pressures.

Tech services firms have actually held margins steady or even improved them in the past year, he added, but clients continue to defer discretionary investments to conserve cash amid geopolitical and macroeconomic volatility.

The Fed’s rate cut may offer marginal relief, but he says that a meaningful revival will only come when uncertainty eases and enterprises gain confidence in the broader economic environment.

Who Benefits

In the near term, Singh sees little difference between large and mid-caps, with client caution shaping decisions across the board.

Nonetheless, Fersht argued that large caps are positioned to capture most absolute dollars, especially BFSI-heavy firms with credible AI expertise.

Select mid-caps may report faster relative growth if they can specialise in sharp niches with productized offerings.

The Big Picture

The turning point will come only when enterprises see measurable AI-driven outcomes in revenue, cost, and risk reduction. Until then, they say, the Fed’s move is a floor, not a ceiling, for Indian IT industry's comeback.