IT stocks’ rise likely temporary3 min read . Updated: 28 Dec 2007, 12:02 AM IST
IT stocks’ rise likely temporary
IT stocks’ rise likely temporary
For a change, stocks of IT services companies have outperformed the market, after Accenture said it’s seeing strong demand for its services in both consulting and outsourcing. The NSE’s CNX IT index has risen by 8.9% since Accenture’s quarterly results announcement on 19 December, much higher than the 5.9% rise in the Nifty in the same period.
Fears of a slowdown in the US and a cut in IT spend by large financial institutions, coupled with a strengthening local currency, had led to a massive underperformance by IT stocks. Domestic companies have maintained that demand continues to be strong and have even suggested that a drop in IT spend could lead to an increase in offshore IT spend, in order to gain more bang for the buck. But the markets have been circumspect and have awaited news about US companies’ IT budgets, which are finalized at this time of the year. There would be further clarity on this when companies report results for the December quarter in the second week of January. Meanwhile, comments from firms such as Accenture, a strong player in the IT outsourcing industry, are as valuable.
The reason IT stocks didn’t rise much more is simply because concerns about a strong local currency remain. In a recent research note, CLSA notes that the rupee has appreciated 4% against the British pound this quarter, which is worrying because a number of Indian firms have increased their billing in pounds and euros to hedge against the depreciating dollar. The rupee’s rise against the pound is over and above the 6% appreciation between January and September. Some Indian firms such as Tech Mahindra and Mastek have an exposure of as much as 72% and 65% to the pound, while top-tier firms TCS and Infosys have a 16% and 14% exposure, respectively. The rupee has been steady against the dollar this quarter, but the medium-term outlook remains grim. The current outperformance by IT stocks could thus be shortlived, unless Indian firms report extremely positive news on the demand front in January.
The last month has seen a sudden slowing in deposit growth, the primary reason for a sharp rise in the incremental credit-deposit (C-D) ratio, which has shot up to 281%. Between 12 October and 7 December, the incremental C-D ratio has been 98%.
FII inflows have dwindled to a trickle and this has had an impact on banks as well, with the growth rate of bank deposits slowing considerably. RBI data show that, as on 7 December, bank deposit growth was 23.9%, against the year-ago period. That’s compared with the 26.7% growth rate on 9 November.
Part of the deceleration in money supply has also been due to lower credit growth, with the y-o-y rate of credit growth slipping to 22.2% for the year to 7 December.
Will the lower deposit growth lead to a tightening of liquidity with banks? There are some signs of that happening, with the C-D ratio moving up to 71.40% on 7 December. This ratio has moved up steadily from the end of October. As a matter of fact, the C-D ratio was last at this level on 14 September, just before the Fed rate cuts led to funds flowing to the Indian market. The easy liquidity generated by foreign fund inflows has now been curtailed and the data illustrate the close links between liquidity in Indian banks and FII inflows.
If the current trend of weak inflows persists, will it lead to a drying up of liquidity among banks and perhaps to higher interest rates? There’s little doubt that liquidity will be affected, although there’s still a while to go before it dries up. That’s because deposit growth, at 23.9%, is still well above the 22.4% rate of growth at the same time last year.
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