What does Fed’s indication of single rate cut mean for Indian IT stocks?

The optimism of markets and the buoyancy of stocks hinge largely on sentiment and projections, which investors closely scrutinise to gauge future market performance. These factors are pivotal, subject to frequent adjustments based on developments that either bolster or dampen investor confidence.

Global factors significantly influence various financial markets, including equities, bonds, commodities, and currencies. Among these factors, one of the most closely monitored events by investors worldwide is the US Federal Reserve monetary policy.

Also Read: Why is gold price nosediving today after US Fed meeting?

Positive indications from the Fed regarding potential rate cuts are particularly significant for markets, especially those in India, and specifically for Indian IT companies. This is because Indian IT firms generate a substantial portion—over 70%—of their revenues from the United States. 

Higher interest rates in the US typically result in reduced consumer spending and lower corporate investment, which in turn leads to decreased orders and lower growth prospects for Indian IT companies. Historically, IT stocks have shown sensitivity to US economic indicators and monetary policy decisions.

Between December 2023 and February 2024, Indian IT stocks experienced a remarkable surge in anticipation of the Fed's first rate cut in March 2024. However, due to persistent inflationary pressures, the Fed opted to maintain its rates during that month. Nonetheless, the Fed indicated its intention to implement three rate cuts throughout 2024.

Also Read: US Fed holds rates at 23-yr high; expects one rate cut in 2024; 5 key takeaways

Moving forward to the latest, the Federal Reserve on Wednesday chose to keep the rate unchanged at a 23-year high range of 5.25% to 5.50%. Moreover, the Fed revised its projected number of rate cuts from three, as signaled in March, to just one. This adjustment effectively removed the possibility of two rate cuts from consideration.

The "dot plot," reflecting the views of 19 FOMC members, including both voters and nonvoters, revealed that four officials favored no cuts for the current year, while seven members projected a single reduction. The remaining eight officials anticipated two rate cuts in 2024.

Also Read: Fed holds rates steady, sees just one cut in 2024 despite inflation progress

Looking ahead, the Fed outlined a more aggressive approach for 2025, with plans for four reductions totaling a full percentage point, an increase from the earlier projection of three cuts. 

The US Fed's bold projections for rate cuts sparked a surge in market optimism, propelling major global indices to achieve new record highs. This positive sentiment extended to Asian markets, driving the Indian benchmark indices - Nifty 50 and Sensex - to also reach fresh peaks.

IT stocks ended the session positively, with the Nifty IT index concluding with a 1% gain at 34,902 points. All ten constituents of the index closed in the green, led by Mphasis, LTI Mindtree, and Coforge, each posting gains of over 2%. The remaining seven constituents saw gains ranging from 0.4% to 1.3%, respectively. 

Also Read: US Fed announcement: Here's how it will impact Indian stock market

If the Fed implemented rate-cut this year, even with just a single reduction, it could lower borrowing costs in the US. This, in turn, might stimulate corporations to expand their IT budgets, potentially leading to increased order volumes for Indian IT companies.

Disclaimer: We advise investors to check with certified experts before taking any investment decisions.