Nifty IT index slips over 3% as US Fed likely to lower pace of rate cuts

Indian IT stocks, which had weathered the recent sell-off driven by the strong rise in the US dollar, came under significant selling pressure on Monday, November 18 as traders scaled back expectations of Federal Reserve interest rate cuts following fresh indications of US economic resilience.

At 12:30 p.m., the Nifty IT index was down 2.64% at 41,269, after dipping 3.2% to the day's low of 41,035. All 10 index constituents traded in the red, with Wipro leading the decline, down 3.6%. Infosys, TCS, and LTIMindtree also traded with losses exceeding 3%.

October US retail sales data, released on Friday, showed a 0.4% increase, slightly higher than estimates. This was followed by a rise in the October consumer price index (CPI) of 0.2% for the month, bringing the 12-month rate to 2.6%, marking the first rise in annual inflation in seven months, or the first acceleration on an annual basis since March.

Meanwhile, weekly jobless claims for the week ending November 9 dropped by 4,000 from the previous week to 217,000, signalling a robust economy. These data points fueled bets that the Federal Reserve may pause its easing cycle in 2025.

Traders, on the other hand, also reacted to recent comments from Federal Reserve Chair Jerome Powell, who said on Thursday that the central bank was “not in a hurry” to cut interest rates. He highlighted the economy’s robust growth, allowing policymakers the time to assess the extent to which they would reduce rates.

“The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell remarked during a speech to business leaders in Dallas. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”

Fed funds futures trading now implies a roughly 62% probability that the Fed will lower interest rates by a quarter point at its December meeting, according to the CME FedWatch Tool. They also reflect a nearly 38% likelihood of central bank policymakers keeping rates steady, as per the recent media reports.

Adding to the uncertainty, concerns about Donald Trump’s victory in the 2024 US presidential election have raised fears over his tariff policies on imported goods and the potential for an escalating fiscal deficit. These factors could pressure the Federal Reserve to delay further rate cuts.

The US central bank began its interest rate-cutting cycle in September, reducing short-term borrowing costs for the first time since the emergency cuts during the COVID-19 pandemic. In November, the Fed lowered its benchmark interest rate again by 25 basis points, bringing it to a range of 4.50-4.75 percent, following a 50 basis point cut. 

Still up over 2.4% for the month

Despite today's sharp sell-off, the Nifty IT index still shows a 2.42% gain for the month so far. The rally in IT stocks began after Donald Trump’s victory in the US Presidential Elections, driven by expectations that his policies would boost IT spending by U.S. companies.

During Trump's first term in office, from January 2017 to January 2021, Indian IT stocks experienced a substantial rally. The Nifty IT index delivered a remarkable return of 150%, significantly outpacing the broader Nifty 50, which gained 60% over the same period.

Recent Q2 results have indicated a positive trend in BFSI (Banking, Financial Services, and Insurance) spending in the U.S., which could be a strong growth driver for Indian IT companies.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.