US rate cut may not benefit Indian IT cos

These steps are just to avoid the US economy getting into a recession. Currently, IT budgets are frozen till June 2024. They will have to cut taxes at least half a dozen times to make any market movement. For now, it is just to stay afloat -- Ashish Chaturvedi, a practice leader at HFS Research, tells Bizz Buzz

What’s On Horizon?

• US Fed hinted 3 rate cuts in 2024 to support economy
• It triggered a big rally across global indices
• Rate cut next year seen as a positive movement for whole industry
• However, sentiment remains way low at this point of time
• It’ll need some time to recover

Bengaluru: US Federal Reserve’s announcement to reduce interest rates in 2024 is unlikely to provide immediate relief to IT services companies though technology stocks across the world has jumped anticipating a turnaround.

According to experts, the sentiment remains low as far as technology spend is concerned. However, they pointed out that such rate reduction may help the US economy to avert recession, which will be favourable for all sectors including IT industry.

“These steps are just to avoid the US economy getting into a recession. Currently, IT budgets are frozen until Q2 of 2024 (till June, 2024). They will have to cut taxes at least half a dozen times to make any market movement. For now, it is just to stay afloat,” Ashish Chaturvedi, a practice leader at international IT consultancy firm, HFS Research told Bizz Buzz.

US Federal Reserve on Wednesday held interest rates steady for a third meeting and gave its clearest signal that rate hike cycle is over as inflation cools down. The central bank has also hinted about three possible rate cuts in 2024 to support the US economy. This announcement has prompted a big rally across global indices as most sectors are going to benefit for such rate cuts. Nifty IT index gained 3.5 per cent on Thursday and 4.56 per cent on Friday, making it one of the biggest sectoral gainers in the market. Owing to series of interest rate hikes in the US, spending across sectors, especially that of BFSI (banking, financial services & insurance) vertical has taken a big hit.

Management of various IT firms have said that within BFSI vertical, especially mortgage, and capital markets segments have been facing slowdown for the last two quarters. This has been reflected in the numbers of second quarter performance. Infosys saw a decline of 7.3 per cent YoY basis in its revenue during the second quarter from its BFSI vertical. Similarly, Tata Consultancy Services (TCS) witnessed a decline of 0.5 per cent in its BFSI revenue during this period. BFSI is the largest vertical for most large and mid-tier IT services companies in India with more than 30 per cent revenue contribution. North America, particularly US, has the largest client base for Indian IT firms in the BFSI space.

This US Fed rate cut announcement next year, therefore, is seen as a positive movement for the whole industry. However, experts opined that sentiment remains way low at this point of time and will need some time to recover.

“Even mortgage stimulation looks difficult. At this point, sentiment is way too low,” Chaturvedi of HFS Research said. Meanwhile, investors are waiting for third quarter performance of Indian IT firms, which will be announced from first week of next month onwards.