Why did Mphasis, Nifty IT gain up to 4% after US Fed cut rates by 50 bps?

IT stocks shine: Information technology (IT) stocks were buzzing in trade on Thursday, September 19, 2024, with some shares rising by as much as 4 per cent during intraday trading. 

The Nifty IT index climbed 1.80 per cent, reaching an intraday high of 42,850.45 points, after the US Fed cut interest rates. Notably, Nifty IT was the top sectoral gainer.

The surge in IT stocks was fuelled by the US Federal Reserve's decision to cut interest rates by 50 basis points, lowering the target range to 4.75 per cent to 5 per cent. This marks the first reduction in over four years and was largely anticipated by the market. Fed Chair Jerome Powell stressed that while the economy remains robust, the central bank aims to proactively address any potential weakening in the job market. It said job gains have slowed, and the unemployment rate has moved up, but remains low.

Among individual performers, Coforge rose 2.92 per cent, Mphasis 2.91 per cent, Wipro by 2.47 per cent, Tech Mahindra by 1.86 per cent, HCLTech by 1.11 per cent, Infosys by 1.73 per cent, Persistent Systems by 3.52 per cent, TCS by 1.74 per cent, and LTIMindtree by 2.87 per cent ( hitting fresh 52-week high of Rs 6,549.40 per share).

According to analysts at ICICI Direct, the move by the Fed is expected to boost discretionary spending, with tech budgets likely to increase, benefiting IT services companies in the medium-long-term. The final impact on the IT sector may become evident by H1FY26.

The boost in IT stocks followed a sharp decline the previous day, marking the steepest drop in over six weeks. Analysts attributed this downturn to the IT sector's historical underperformance during previous rate cut cycles, coupled with Accenture's announcement to delay employee promotions, which negatively impacted investor sentiment. 

The correction in Accenture's stock, which fell nearly 5 per cent, was also a factor, as the company informed employees that most promotions would occur in June instead of the usual December time frame due to a challenging consultancy environment.

Despite the positive outlook for future spending, investor sentiment in the IT sector has weakened compounded by Accenture’s decision to delay staff promotions to June, reflecting a challenging consultancy environment dampening optimism. A demand recovery is expected only three to six months after this first US rate cut. Factors like global economic concerns and a weakening US dollar may add near term pressure on the sector's performance, analysts at ICICI Direct said.

At 9:45 AM, the Nifty IT index was trading 1.03 per cent higher at 42,524.85 points, while the Nifty50 reached record levels, and was trading 0.88 per cent higher at 25,599.95 levels.