IT stocks came under pressure on Thursday, with the Nifty IT index falling 1.46%, making it the worst-performing sectoral index on Dalal Street.
Among the biggest losers were Infosys, which fell 2.31%, Tech Mahindra was down 1.42%, HCLTech slid 1.17%, lost 1.20%, while Persistent Systems and Wipro also lost 1.68% and 0.68% respectively in early trade.
The selling was visible in the benchmark indices as well, with Infosys, Tech Mahindra, HCLTech and TCS featuring among the top losers on the Sensex.
The decline comes after a strong rally in IT stocks over the past few sessions. But investors are now reassessing the outlook after the US Federal Reserve signalled that interest rates could stay higher for longer and may even rise again later this year.
Most large Indian IT companies earn a significant portion of their revenue from the United States.
Infosys gets around 60% of its revenue from North America. TCS, HCLTech, Wipro and Tech Mahindra also depend heavily on US clients.
This means that what happens in the US economy often has a direct impact on Indian IT companies.
The Federal Reserve on Wednesday kept interest rates unchanged, but its commentary was more hawkish than expected. Policymakers indicated that inflation remains a concern and another rate hike could be on the table later this year.
Dr VK Vijayakumar of Geojit Financial Services noted that the Fed’s updated projections suggest a possible rate hike in October, while US bond yields climbed to 4.46%.
For a common investor, the link is quite simple.
When interest rates stay high, borrowing becomes expensive for businesses.
As a result, many US companies become cautious about spending on technology upgrades, digital transformation projects and IT outsourcing.
Since Indian IT firms earn money by providing these services, any slowdown in corporate technology spending can affect future revenue growth.
Think of it this way: if a US company is paying higher interest on loans and facing economic uncertainty, it may postpone a large software upgrade or cloud migration project. That directly impacts companies like Infosys, TCS and HCLTech.
There is another reason investors sell technology stocks when rates rise.
Technology companies are valued based on their future earnings. When interest rates and bond yields rise, investors discount those future earnings more heavily.
As a result, the present value of those future profits falls, making technology stocks less attractive.
This is why US technology shares also came under pressure overnight, with investors cutting exposure to growth stocks.
The weakness in Wall Street technology stocks spilled over to Indian IT counters on Thursday.
This is where comes in.
Brent crude has fallen sharply to around $78 a barrel after the US-Iran peace agreement reduced fears of supply disruptions in the Strait of Hormuz.
Lower crude prices are a major positive for India because they reduce inflation, support the rupee and improve the country’s current account balance.
This is helping sectors such as banks, consumer stocks, automobiles and domestic-focused businesses.
In other words:
Falling oil prices are helping the overall market.The Fed’s hawkish stance is hurting export-oriented IT companies.
That is why the broader market remains resilient even as IT stocks face selling pressure.
Another reason behind Thursday’s decline is profit booking.
IT stocks had recently staged a strong rebound as crude oil prices fell and investor sentiment improved.
After the rally, many traders chose to lock in profits when the Fed’s commentary raised fresh concerns about global growth and technology spending.
The key trigger for IT stocks will be the US economy.
Investors will monitor future Fed policy decisions, US inflation data, corporate technology spending trends, US bond yields, and earnings guidance from major IT companies.
For now, lower crude prices continue to support the broader Indian market, but IT stocks may remain volatile as investors assess whether higher US interest rates could slow demand from their biggest market.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)