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indian it sector us fed: Tech services demand may rise on upbeat statements from Fed


Demand for technology services, which is showing early signs of a revival after a lull, is likely to get a boost following the statements made by the US central bank last week, industry executives and experts told ET.

A material impact may start showing in the fiscal fourth quarter (January-March 2024) or the following three-month period (first quarter of fiscal 2025), they said.

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On Wednesday, the US Federal Reserve said it is holding its benchmark interest rate steady, extending a reprieve for borrowers after the fastest series of hikes in four decades. The central bank also indicated it expects three rate cuts in 2024.

Expectation of easing inflation and rate cuts in the US could encourage large corporations to increase tech budgets and revive mothballed projects, offering higher deal inflows for Indian IT services from their biggest market.

BSE’s Sensex index gained over 2,000 points in just two trading sessions after Fed’s commentary on Wednesday, with the infotech sector contributing 652 points of that. On Friday, shares of sector leaders Infosys, Tata Consultancy Services and HCL Technologies surged by 5-6%.

Outsourcing expert Pareekh Jain said the Fed commentary will positively impact several paused and delayed IT service programmes. “The inflation data and commentary on three potential rate cuts through the year will drive higher consumer spending and optimism among the IT clients leading to investment flow. This is likely to also benefit segments that involve investments dependent on interest rates, like digital transformation programmes that have slowed down over the past year,” Jain said.

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Many US-based companies that are due for loan refinancing in 2024 will be watching out for the interest rate cuts. Based on the timeline of these cuts, IT services firms can expect a flow of investment to delayed or deferred projects in segments like manufacturing, utilities and telecom, where high-interest rates had hurt projects, Jain said.

A senior executive of a leading Indian IT services firm said his company is keenly watching Fed’s moves. The executive said its commentary may lead to an uptick in Q4 deal pipelines even as it is unlikely to have any impact on the ongoing quarter. The October-December fiscal third quarter is a seasonally weak one with several furloughs (holidays) and is almost at its fag end now.

“Companies will continue to be cautious for another quarter but stable rates will appease customers who have been on a high-alert mode, and allow them to plan their 2024 budgets judiciously,” said the executive, adding that he expects the first quarter of fiscal 2025 to start showing positive growth demand.

ET reported this week that green shoots have started showing for the IT services companies after a catastrophic year, with increase in IT budgets expected for calendar year 2024 and an uptick in hiring.

High US interest rates and lingering concerns over inflation have hurt tech spending by global companies, impacting the deal momentum for the Indian IT services sector over the last few quarters. IT firms have highlighted that even though deal wins were fairly healthy, this was not translating commensurately into revenue due to longer deal durations of recent contracts, delayed starts/ramp-ups and rising scrutiny of projects signed 2-3 years back which was impacting renewals. This was largely due to the “uncertainty” about the macroeconomic environment.

“Inflation risks are still seen as skewed to the upside, though by the lowest since early 2021… (Fed chairman Jerome) Powell ensured to express his satisfaction with the ‘progress’ on the immaculate disinflation – the word made repeated mentions though he mentioned that it was too soon to declare a victory,” Madhavi Arora, lead economist at Emkay Global Financial Services, wrote in a report.

If inflation eases, worries of lower spending by US firms may go away, benefitting Indian IT companies.

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