Indian IT stocks, which have been gaining momentum in recent weeks due to the anticipation of US Federal Reserve rate cuts, continued to rise in today's trading. This followed clear indications from Federal Reserve Chairman Jerome Powell that the central bank is likely to reduce interest rates at the September meeting. Powell made these comments during his speech at the Jackson Hole Economic Symposium.
He observed that the US labour market is cooling rapidly, highlighted by the softer July jobs report and last week's downward revision to payroll figures. Powell also mentioned that the Federal Open Market Committee (FOMC) is increasingly confident that inflation is slowing toward the central bank’s 2% target, which justifies adjusting monetary policy to less restrictive conditions.
The minutes from the Fed's July meeting indicated a probable course of action: Most members of the rate-setting committee believed it would likely be "appropriate" to cut rates in September if the data continued to align with expectations.
Many analysts predict the Fed will proceed with a cautious quarter-point rate cut in September, though a larger half-point cut remains a possibility depending on upcoming economic data.
According to data from CME Group, futures traders estimate a 70% chance of a smaller rate cut in September and about a 30% likelihood of a larger reduction.
With the anticipation of a rate cut in September, Indian IT stocks have continued their bullish momentum in today's session, leading the Nifty IT index to rise by 1.77%, reaching 41,820 points. All 10 index constituents ended the session in positive territory, with HCL Technologies, Persistent Systems, and Tech Mahindra hitting new 52-week highs.
Since May, the Nifty IT index has jumped 28.50%, outperforming all the sectoral indices.
The Fed's benchmark lending rate is currently at a 23-year peak, ranging between 5.25% and 5.50%, which has been instrumental in cooling demand in the US economy.
Federal Reserve Chairman Jerome Powell stated that the Fed's restrictive monetary policy has "helped restore balance between aggregate supply and demand, reducing inflationary pressures and keeping inflation expectations stable."
After maintaining its key lending rate at this two-decade high for over a year, Powell's comments strongly indicate that the US central bank is now poised to begin cutting rates in September, as inflation continues to decline.
Higher interest rates in the US have led to reduced consumer spending and decreased corporate investment, which resulted in fewer orders for Indian companies. If the Federal Reserve begins cutting rates, borrowing costs in the US will decrease.
This could encourage corporations to expand their IT budgets, potentially boosting order volumes for Indian IT firms. Domestic brokerage firm Nuvama Institutional Equities has pointed out that the expected interest rate cuts in the US could revive tech spending by American corporations, which has been stagnant for nearly two years.
Recent media reports indicated that global banks, including JPMorgan Chase and Bank of America, had already started reviving technology projects that were put on hold in 2023. This revival was expected to boost earnings for Indian companies, as a significant portion of their revenue comes from the BFSI sector.
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.
