Demand recovery likely for Indian IT firms on US Fed rate cuts: JP Morgan

Bengaluru, 4 January: Global brokerage firm JP Morgan is expecting a demand recovery for Indian IT services industry in 2024 on the back of likely interest rate cuts by the US Federal Reserve.

In a report, the brokerage firm said that it has upgraded its view from bearish to neutral for Indian IT sector players.

The firm is of the opinion that a pivot in rate cuts by the US Federal Reservecoupled with cost-saving measures by enterprises, pro-cyclicality, near-term generative artificial intelligence (Gen AI) preparatory work and a very low base of 2023 will help creation of a better demand environment for the Indian IT firms.

Factoring in those expectations, the brokerage has upgraded its ratings for IT majors like Infosys and L&T Technology Services to 'overweight' while others, including TCS, HCLTech, Mphasis and Persistent Systems are lifted to 'neutral' calls from 'underweight' earlier.

The global brokerage firm has also upgraded its stance on the information technology sector to 'neutral' from the earlier bearish view based on rate cut expectations along with low base.

Indian IT industry witnessed significant slowdown in 2023 with revenue growth coming down to singe digits. Many IT firms are anticipating low single digit growth in top line this year as enterprises hold back spend.

The US Federal Reserve has announced to reduce interest rates by three times in 2024 as inflation stabilizes in the North American country. If this happens, then cost of capital is expected to come down, resulting in more funds in the hands of businesses to invest on technology-related advancements.

Currently, clients of Indian IT firms are holding back discretionary spend, negatively impacting the digital deals. As revenue from digital deals contributes around 50 per cent to the total top line, such slowdown has resulted in period of low growth for the Indian IT firms.