Fed meeting: Can a hawkish US central bank derail the recovery in the IT stocks?

The Nifty IT index has been in the green since May this year on a monthly basis but concerns are growing that if interest rates in the US stay high for a longer than expected period, it will impact the Indian IT stocks.

An aggressive Fed is bad news for economic growth in the US and a weakness in the US economy is bad news for Indian IT companies because of their high exposure to the US market.

Even though the US Fed maintained a pause on interest rate hikes, on expected lines, its hawkish tone appears to have spooked markets and the Nifty 50 suffered a loss of almost a per cent in intraday trade on Thursday.

The US Federal Reserve unanimously voted to keep interest rates at a 22-year high mark ---between 5.25 per cent to 5.5- per cent, while forecasting an additional rate hike before the end of the year to bring down inflation.

Read more: US Fed Meeting Highlights: At 5.25%-5.5%, FOMC holds rates unchanged at 22-year high-mark

Experts expected the markets to react negatively to the Fed commentary.

"The US Fed left interest rates unchanged but said that there is room for yet another rate hike in 2023 followed by two rate cuts in 2024. Interest rates are likely to stay at an elevated level for longer than the market expected," said Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securities.

"The markets are likely to remain under pressure till they adjust and digest the fact that interest rates are actually not going down in a hurry. We believe that high interest rates are not good for the markets. Both the yields and markets cannot stay at an elevated level for too long. Either one will break down. Given that the Fed is resolute in its stand it could be the markets which break down first," Sheth said.

Also read: PIMCO warns market is underestimating risk of US recession and rate hikes

The impact of hawkish Fed on IT stocks

Experts do not see a significant impact of a hawkish Fed on IT stocks as the market was already expecting one hike by the end of the year.

Deepak Jasani, Head of Retail Research at HDFC Securities underscored that the hint of one more rate hike by the US Fed going ahead may not have any major impact on order inflows for Indian IT companies.

"The possibility of a recession setting in the US is low. However, this may impact the valuation of companies listed on Nasdaq. As Indian IT companies are more service players (versus product companies), their valuations may not be impacted much," Jasani pointed out.

"We think select IT service companies can be bought on an SIP basis over the next few months to ensure attractive entry prices. The stock prices of IT companies may provide 12-15 per cent annualised return post that," said Jasani.

Also read: TCS, Tech Mahindra, Persistent Systems among top bets as IT stocks surge 22-92% from their 52-week lows

Vinod TP, a research analyst at Geojit Financial Services believes that the anticipation of prolonged high rates and the risk of impending Fed hike will have a short-term negative impact on the Indian IT sector.

However, he pointed out that the Fed has also projected a drop in inflation next year, which would end up being a soft landing for the US.

"The diminished possibility of recession has already started to show signs of green shoots in the Indian IT industry. The boosted client confidence resulted in an increase in large deals with top Indian IT companies, further enhancing revenue visibility. We don’t anticipate deep correction and further notable corrections in IT stocks will result in attractive valuations, favourable for long-term investors," said the Geojit analyst.

Also read: Infosys share price underperforms IT index. Buying opportunity or stay away stock?

Manoj Dalmia, CEO of Proficient Equities Pvt Ltd said it is important to understand that changes in US interest rates have a ripple effect around the world.

"Generally, they tend to have a negative impact on various segments of the economy because they can slow down economic growth. This presents difficulties for Indian IT companies because they have already stated that the fiscal year 2024 road ahead appears to be difficult," said Dalmia.

Dalmia underscored that India’s exports of IT didn’t suffer greatly during earlier rate increases. Therefore, further rate increases are unlikely to have a materially negative effect on IT exports. Those IT firms that have spread their revenue streams across nations and sectors are better equipped to handle the difficulties brought on by the current state of the market, Dalmia said.

However, experts say it can't be said that the Indian IT firms will remain completely unaffected by the hawkish Fed.

Shrey Jain, CEO and Founder of SAS Online said the Fed's tough stance on interest rates might bring unwelcome news for Indian IT companies that generate a substantial portion of their revenue from US clients.

"The earnings of Indian IT giants such as Tata Consultancy Services, Infosys, HCL Technologies, Wipro, Tech Mahindra, and L&T Technology Services could potentially take a hit in the future due to potential interest rate hikes in the United States. Additionally, companies involved in cloud technology, digitalisation, generative AI, and cybersecurity are well-positioned to strengthen their revenue prospects and maintain a positive outlook," said Jain.

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