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Rate cuts in Europe keep Indian IT sector's hopes up

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Beena Parmar

, ETtechLast Updated: Sep 17, 2024, 06:00:00 AM IST

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While industry analysts foresee this as a tailwind along with the ongoing digital adoption by enterprises, they said the impact on the industry may be felt only by the fourth quarter of this fiscal ending March 2025.

The Indian IT industry is hoping that international clients will start increasing their technology budgets soon as Europe has started reducing interest rates and the US is expected to follow suit.

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While industry analysts foresee this as a tailwind along with the ongoing digital adoption by enterprises, they said the impact on the industry may be felt only by the fourth quarter of this fiscal ending March 2025.

"We think the first change will reflect in the management commentary turning more optimistic and references to green shoots in discretionary demand pickup," said Kumar Rakesh, associate director at BNP Paribas, who closely tracks the IT sector. "Impact on earnings will likely take a little longer and we think it will start reflecting in CY2025."

The European Central Bank's second interest rate cut last week signalled a declining path for borrowing costs in Europe, providing lending support for consumers and enterprises in the months ahead.

Further, the US central bank is expected to follow suit with its first interest rate reduction in over four years since 2020 at its meeting this week.

Europe is a key revenue market for the $250-billion Indian outsourcing industry after the American region.

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"With cheaper access to capital, global companies could ramp up larger, high-stakes projects and boost outsourcing to Indian IT firms, albeit the impact will be felt in Q4 2024 or Q1 2025," said Saurabh Gupta, president of research and advisory services at HFS Research. "Industry leaders are confidently bullish."

Most experts believe the race to drive innovation, increasing demand for artificial intelligence (AI), cloud transformation, cybersecurity solutions, and relentless cost-cutting pressures will benefit outsourcing.

Discretionary spending on technology, a key driver to aid business for software service providers, has remained cautious across a majority of IT clients in the past five quarters or more.

Rakesh of BNP Paribas expects discretionary IT services demand to start picking up following a rate cut by the US Federal Reserve (Fed).