The US Federal Reserve’s steeper-than-expected interest rate cut augurs well for India’s $254-billion information technology services sector, as lower borrowing costs could prompt companies to increase their spending on technology. The US is the biggest market for India’s IT services sector.
The US Fed cut its benchmark lending rate by half a percentage point early Thursday, marking its first interest rate cut in more than four years. Fed chair Jerome Powell said the rate cut was prompted by indicators suggesting that US “economic activity has continued to expand at a solid pace.”
But what does this mean for India’s IT services companies?
Fortune 500 companies that are clients of India’s IT services providers have clamped down on discretionary or non-essential tech spending in recent years due to various factors, including growth-related, macroeconomic uncertainty, and high borrowing costs.
However, the Fed’s 50 basis point rate cut is expected to prompt a revival in demand from IT services companies.
“The rate cuts were long-awaited and wished for. The interest rate cuts will allow US businesses to borrow and spend more, which means there will be more discretionary spends available for IT services,” said Ashutosh Sharma, vice president and research director at Forrester Research.
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US clients of Indian IT services companies can now borrow from banks at a cheaper rate to fund technology projects that they had put on ice.
Top bosses of Indian IT companies have been anticipating the prospects of a rate cut in the US for some time now.
“I think even now there is some amount of discretionary spend happening, but for customers to become a little bit liberal and open-minded in doing new work, I think it’s largely driven by the economic pressures, whether it is interest rates or inflation and things like that,” C. Vijayakumar, chief executive officer of HCL Technologies Ltd, had said at a post-earnings analyst interaction in July in response to a question on discretionary spending by clients.
His counterpart and Infosys Ltd CEO Salil Parekh adopted a more tempered stance.
“On a macro level, there is, not with clients, but generally speaking, a view that if US inflation and interest rate and all of those discussions change, that will change something. But we do not know what will that trigger be,” Parekh had said at the company’s post-earnings analyst call in July.
Tata Consultancy Services Ltd, Infosys and Cognizant Technology Solutions Corp. get 50%, 59%, and 73% of their business from North America, of which the US contributes the major part. This geography has been among the slowest-growing segment for the companies since last year.
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Beyond BFSI, but wait…
Sanjeev Hota, vice-president and head of research at brokerage Sharekhan, expects the Fed’s rate cut to spur demand beyond the banking, financial services and insurance (BFSI) sector—historically the biggest cash cow for IT services companies.
“The rate cuts will also impact the manufacturing space as these companies are capital-intensive. They can borrow more and spend more on the operating expenditure side of the business, which can revive discretionary spend going forward,” Hota said.
A third analyst echoed a similar sentiment that capital-intensive sectors, which are asset-heavy, stand to benefit from the rate cut.
“Companies in asset-heavy sectors such as manufacturing and telecom, which need to raise funds from banks regularly, will stand to benefit as they can start new projects and revive discretionary spending which were once put on hold,” said this Mumbai-based analyst on condition of anonymity.
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However, this revival in discretionary tech spending is not expected to begin immediately, each of the above-mentioned analysts said. Companies decide their budgets January onwards, and any pick-up in non-essential tech spending will start reflecting in orders only next year.
Indian IT stocks plunged on Wednesday as investors sought to lock in gains ahead of the US Fed’s rate decision, with the Nifty IT index dropping 3.7% to a two-week low.
On Thursday, the Nifty IT index shed another 143.70 points to end 0.34% lower at 41,945.60, while the broader Nifty 50 ended nearly unchanged, inching up 0.15% to 25,415.80 points.
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