In Wednesday's intra-day trading, shares of major information technology (IT) companies saw a decline of up to 6% on the National Stock Exchange (NSE). This drop comes as investors opt to book profits before a critical Federal Reserve interest rate decision. The decline affected several prominent IT firms, including Mphasis, Infosys, and Tech Mahindra, among others.
Impact on the Nifty IT Index
At 10:32 AM, the Nifty IT index, the sector’s biggest loser, was down by 3%, contrasting with a stable Nifty 50 index, which was at 25,418.85. Despite this recent dip, the Nifty IT index has shown impressive performance over the past three months, surging by 25%. It reached a peak of 43,415 on Tuesday before the current downturn.
Accenture's staff promotion delay
Additionally, the decline in IT stocks may be linked to a report indicating that Accenture Plc plans to delay most of its staff promotions by six months. According to a Bloomberg report, the Dublin-based technology company informed its employees in an internal blog post that it would announce promotions in June instead of the usual December.
Potential effects of Fed rate cut
The Federal Reserve's anticipated rate cut could have several impacts on the IT services sector, according to JM Financial Institutional Securities. Analysts suggest that a lower cost of equity might increase stock multiples, revive discretionary demand as the economy recovers, and reduce the interest burden on corporates, potentially benefiting IT services. The sector's performance may be influenced by these factors, alongside the expected revival of spending by US banks, which could benefit companies like Infosys and TCS.
Recent sector trends
The first quarter of FY25 showed positive incremental services growth for the first time in five quarters, indicating a potential end to the phase of excessive IT unwinding. This trend, driven by new project starts and slowing cancellations, is expected to continue despite the rate decision.
Analysts also note that the recent rise in sector multiples reflects anticipated Fed rate cuts, as seen in the yield differential between Nifty IT and US 10-Year Bonds.
Long-term outlook for the IT sector
Looking ahead, Nasscom projects that the Indian IT market will double to approximately $500 billion by FY30, with a compound annual growth rate (CAGR) of around 12.0% from FY24 to FY30. This growth outpaces the global IT spending CAGR of about 5.0% over the same period.
The anticipated increase in demand, driven by investments in generative AI and a robust local talent pool, is expected to bolster Indian IT exports.
Sector investment opportunities
Despite short-term uncertainties, the broader theme of IT services outsourcing remains positive. As global enterprises continue to modernise and transform their operations, the sector is likely to benefit from an improved macro environment. Although caution is advised due to potential delays from the upcoming US election, the long-term outlook for IT services remains optimistic.Investors interested in the IT sector can explore opportunities to buy shares online, keeping an eye on how the Fed's rate decision might affect market dynamics and stock performances.
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