The Nifty IT index declined over 1% on November 28, emerging as the weakest performer on the Nifty 50 after US inflation data signalled higher consumer spending for October. This unexpected increase raised concerns about the Federal Reserve's timeline for rate cuts, casting uncertainty over sectors like information technology, which rely heavily on US markets.
US inflation data and its impact
Consumer spending in the US rose by 0.4% in October, exceeding the anticipated 0.3% gain and following a revised 0.6% increase in September. This strong growth indicates a resilient US economy but also suggests that inflationary pressures remain stubborn. As a result, the Fed may slow down its pace of rate cuts, affecting global markets, including India's IT sector.
At 10:15 AM, the Nifty IT index was trading 1% lower at 43,630, with all 10 constituent stocks showing declines of 0.3% to 1.3%. This comes after IT stocks showed an 8% recovery in November, rebounding from a 2% dip in September and a 4% drop in October.
Outlook for Indian IT companies
Brokerage firm Bernstein maintained an optimistic long-term outlook for the IT sector despite recent setbacks. Its latest report highlighted strong growth prospects in FY26, driven by robust order books, increasing AI adoption, and recovering growth trends starting from the second half of FY25.
Bernstein is particularly bullish on large-cap stocks like Infosys and TCS, which derive 50-60% of their revenue from the US and have a 30% exposure to the BFSI sector. These companies are recognised for their strong client relationships and margin resilience, key factors in navigating economic uncertainties.
In the small and mid-cap segments, Persistent Systems is favoured due to its 80% revenue exposure to the US market, positioning it for medium-term growth in the high teens.
Challenges and opportunities
Despite the positive outlook, challenges remain. The absence of mega deals in FY25 led to a 0.4% year-on-year decline in total contract value (TCV) for the top five IT firms during H1, as per JM Financial analysts. For FY26, growth will depend on a revival of short-cycle and discretionary deals coupled with sustained momentum in manufacturing and energy verticals.For investors, the current dip in the IT index may present an opportunity to explore share market investment, particularly in companies well-positioned for future growth. A strategic approach focusing on strong fundamentals and diversification across large-cap and mid-cap IT firms could yield long-term benefits.
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