Fed Rate Cut Brings Cheer To Indian IT Firms

The trajectory of interest cost increases for corporates across sectors has been slower than the Fed rate hikes. Many sectors have marginally deleveraged over the past 4 years, and operational expenditures, as a percentage of revenue, have generally decreased - JM Financial in its latest report

Bengaluru: The US Federal Reserve’s move to reduce interest rates by 0.5 per cent after four years is likely support growth of communication & media along with manufacturing verticals of the IT industry in the near-term.

According to analysts, growth in the financial services vertical is also expected to be supported in the coming quarters on the back of reduction in interest rates.

“Reduced interest burdens are likely to benefit sectors like CME (communication, media & entertainment) and manufacturing, positioning companies like Tech Mahindra favourably. A more significant boost may come from a revival of US bank spending, which would benefit large-cap IT firms,” JM Financial, a brokerage firm, wrote in a note.

According to sources in the know, cost of capital for enterprises will not come down immediately after the interest rate cut by the US Fed. Rather, it will be a gradual process, whose benefits will translate in the coming quarters.

“The trajectory of interest cost increases for corporates across sectors has been slower than the Fed rate hikes. Many sectors have marginally deleveraged over the past four years, and operational expenditures, as a percentage of revenue, have generally decreased,” JM Financial report said.

Such trend indicates that corporations have optimised debt and operations to cushion the impact of higher interest costs.

Especially, manufacturing and telecom firms have optimised their operational expenditures in recent years and will be benefitted more from the interest rate cuts.

Similarly, large banks are likely to spend more on technology as lower interest rate is likely to boost their earnings through higher lending activities.

“BFS (banking, financial services) is the most important segment for Indian IT firms. After the US Fed’s interest rate cut, lending rates are likely to come down. However, the immediate boost to spending is not likely owing to slow translation,” said an industry source.

This is because longer-tenured debt will see gradual decline in may have limited the transmission of lower rates, meaning the impact of rate cuts on spending could be gradual.

Meanwhile, consumer-facing industries like retail, automotive, and others are not likely to see any revival in the ongoing quarter.

“Rate translation to consumers happens with a lag. Therefore, retail and automotive verticals will not see much benefit in the coming quarters,” said the source.

According to management of Indian IT firms, interest rate cuts of around one per cent or more will help the IT spending to revive in the US. Therefore, discretionary spend for the IT industry is still some quarters away, according to analysts.