Nifty IT index slips over 2%; Infosys, LTIMindtree, LTTS down up to 5%

For the Indian IT services sector, which derives over 60 per cent of its revenues from the US, the Fed's cautious stance has mixed implications

Information technology (IT) shares were under pressure, with the Nifty IT index slipping over 2 per cent on the National Stock Exchange (NSE) in Thursday’s intra-day trade after the US Federal Reserve cut its key interest rate by 0.25 per cent, while signaling a slower pace of rate cuts moving forward.

 

The Nifty IT index was down 2.4 per cent at 44,434.10 in intra-day deals. At 09:39 AM, the IT index had erased its partial losses and was down 1.3 per cent, as compared to the 1.08 per cent decline on the Nifty 50.

 

Shares of LTIMindtree, L&T Technology Services, Wipro, Infosys, Mphasis, Tech Mahindra and Persistent Systems were down in the range of 1 per cent and 5 per cent.

 

While cutting the key interest rate by 25 basis points to a range of between 4.25 per cent and 4.5 per cent, as penciled-in by the markets, the US Fed said that it may lower rates only twice in 2025, the timing of which is uncertain for now. 

 

The Fed projected an average of two rate cuts in 2025, down from the earlier estimate of four, citing persistent "somewhat elevated" consumer prices in the US economy.

 

For the Indian IT services sector, which derives over 60 per cent of its revenue from the US, the Fed's cautious stance has mixed implications. While a weaker rupee generally boosts export revenues, a weakening US dollar can dampen future revenue visibility, particularly for discretionary spend-based engagements, ICICI Direct Research said in a note.

 

Although the recent 25 bps rate cut is expected to aid recovery in discretionary spending, the Fed's cautious approach suggests that this recovery will be slower, potentially delaying a more robust revival in IT spending, the brokerage firm said.

 

Mirae Asset Sharekhan anticipates growth momentum to return in FY25, aided by a lower base coupled with easing sector headwinds. Though the IT sector has already outperformed Nifty last year, the brokerage firm expects overall outperformance in CY24 as well, driven by receding headwinds and better earnings visibility.

 

"Even though the rate cut of 25 bps was in tune with the market’s expectation, the indication of only two cuts of 25 bps each in 2025 against market expectation of three or even four cuts spooked the market, resulting in a sharp sell-off on Wall Street. The Fed chief’s comments regarding the economy and the labour market are, in fact, positive, suggesting a resilient US economy. But always the market gets spooked when the reality falls short of expectations," said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

 

Meanwhile, healthcare has been the fastest-growing vertical for IT companies; it has done the heavy lifting for growth in recent times. However, with the potential return of Donald Trump as US President and the prospect of new healthcare reforms there could bring some short-term uncertainty in healthcare spending, Motilal Oswal Financial Services (MOFSL) said in its technology sector report.

 

The brokerage firm expects healthcare to be the fastest-growing vertical over the medium- to long-term due to neutral tailwinds from rate cuts, a low threat of insourcing, and stable spends backed by the need for investment in drug discovery, biotechnology and clinical trials.

 

“However, we would watch out for commentary on the vertical in the upcoming earnings season and a potential impact from the new administration in the US. While we expect growth to moderate in the short term, it should resume once policy clarity emerges in 1HCY25,” MOFSL said.

 

Persistent Systems has the highest reliance on the healthcare vertical with a 28 per cent revenue contribution, followed by HCL Tech (16 per cent) and Wipro (14 per cent).