Indian IT Firms Stand To Gain In Coming Quarters Following US Fed Rate Cut

Indian IT industry is pinning its hopes on the upcoming interest rate cuts by the US Federal Reserve starting this month. In all likelihood, the US central bank is likely to reduce interest rates as job and inflation-related data points provide comfort for the rate cuts. Most analysts are expecting 25-50 basis points cut in interest rate on September 18. As the US Fed is all set to reduce interest rates, IT services firms and even technology giants are expecting good times ahead. After the surge in demand for technology-related services post-pandemic, demand has tapered down in the last one and half years. This is especially, true for IT services companies. With geopolitical situations being volatile owing to two ongoing conflicts, inflation has surged across the US and European continents. This has increased the cost pressure for enterprises. In turn, global companies have reduced their technology spending, impacting the deal flow adversely for Indian IT services companies. Most of the deals have come more in the form of cost optimisation than digital transformation ones. Even companies have experienced uneven work order from clients, impacting the volume of work.

Such tight demand environment has prompted Indian IT firms to reduce their employee count as the top line felt the pinch. Now, when the US Fed is all set to reduce interest rates, Indian IT firms are hopeful that things will be better in the coming days. The all-important BFSI (Banking, Financial Services & Insurance) vertical is likely to perform better in the coming quarters once the interest rate is reduced. At present, the lending activity is subdued and is affecting various banking segments, including mortgage. Once the interest rate comes down, lending activity is expected to improve. This will lead to more interest earning for banks. More funds with the banks will definitely boost technology budgets of individual lenders. While technology spends by large banks are stable, the small and mid-tier banks have gone in for spending cuts. This phenomenon is likely to improve in the coming quarters.

Other rate sensitive sectors like automobile, aviation and retail, among others are expected to do better once rate cut kicks up.

Higher consumer demand will definitely improve the spending power of companies operating in these sectors. In turn, they will be able to spend more on technology projects. Currently, spending on digital projects is on hold by clients. Rate cuts in subsequent months will lead to more spending on these digital projects. Moreover, new initiatives can only be pursued when the going is good. Currently, many new projects related to AI, ML, IoT, generative AI, cloud computing and data analytics are on hold as companies are keen on executing those projects as they can provide immediate RoI (return on investment). However, once the earnings improve, these new projects will again get attention from companies. Indian IT firms are expected to see better project flows in the coming quarters. This will not only improve their top lines, but also will lead to better operating margins in the second half of the ongoing fiscal year.