Indian outsourcing leaders will likely have to wait longer, perhaps until the start of FY26, for a revival in business as the US Federal Reserve could keep interest rates elevated in the world’s largest economy to ensure a lasting victory over politically uncomfortable inflation. High real rates could elevate hurdle rates for companies, potentially crimping growth in discretionary technology spends.

“The Fed’s hawkish approach is a double-edged sword. Higher interest rates could lead US clients to curtail discretionary IT spending, impacting revenue growth for Indian firms,” said Hansa Iyengar, senior lead analyst for UK-based IT research firm Omdia.

Even as FY24 earnings showed subdued revenue growth across Indian IT majors, strong deal wins and expectations of technology services demand coming back had renewed business revival hopes in the second half of fiscal 2025 that ends in March next year. Most IT majors however have continued to be cautiously optimistic given the prolonged uncertainty in the industry.

Last week, the US Federal Reserve said the rates will remain ‘high for long’ amid elevated inflation (3.5% in March against target of 2%) dashing the optimism that could have been supported by a rate cut. An interest rate reduction pushes clients to loosen their purse strings and increase tech capital expenditure. Given an election year in the US coupled with ongoing geopolitical uncertainty in the western regions, India’s software exporters may have to bank on the next fiscal year for return of growth.

Global IT giant Cognizant CEO Ravi Kumar S sees the times for IT companies as an “unusual situation”. To an ET query on Fed’s rate decision impact during the post results conference call, Kumar said he sees high interest rates as the reason behind smaller deals and discretionary spends not happening. Without clearly stating the impact, he said, “Our clients are continuing to watch this because signalling any of this (change in rates) will also lead to change in the discretionary spend.”

Deals execution could also be dented if outlook doesn’t improve amid ongoing global war uncertainty and if pressure increases on commodity prices.

IT veteran and former Wipro CFO Suresh Senapaty said the interest rates will impact in the short term as companies will continue to remain watchful of their spending. Delay of a Quarter?

“Although, there is clearly a pent up requirement for tech services among enterprises but that will happen as soon as outlook improves on interest rate signs. Maybe this Fed move can prolong decision making by a quarter or so,” he said.

“Under such circumstances, demand will not revive, and enterprises will want to save every penny. Companies will wait for clarity. This is also a reason why despite reporting strong TCV (total contract value) numbers (of deals in Q4FY24), most revenue guidance still continues to be low and therefore deals may not translate into revenues as they may get rescoped or shelved,” Kotak Securities’ vice president Sumit Pokharna said.

In the last fiscal year ending March 2024, IT majors Tata Consultancy Services (TCS), Infosys and HCL Technologies (HCLTech) reported revenue growth in constant currency (CC) terms at 3.4%, 1.4%, 5.0%, respectively, while Wipro and Tech Mahindra’s revenues declined by 4.4% and 5.4%, respectively.

For FY25, Infosys projects overall revenue to grow 1-3% in constant currency terms, while HCLTech expects 3-5% revenue growth. Wipro, which provides quarterly guidance, estimates April-June quarter revenue to be between negative 1.5% and positive 0.5% at best. TCS does not give guidance and Tech Mahindra said FY25 will be better than FY24.

Joseph Anantharaju, executive vice chairman and CEO at mid-sized lender Happiest Minds Technologies said that if the inflation is in reasonable limits, it (rates) shouldn’t impact. “…because if the inflation levels go up significantly, then you have issues in terms of your margin pressure and other things. But as long as it ranges around 3-3.5%, if that’s maintained at that level, it shouldn’t have much of a bearing.”

BFSI Demand Revival

Moreover, a large part of IT firms’ revenue comes from banking, financial services and insurance (BFSI). This suggests that if interest rates remain high, banks’ business continues to remain weak and their technology spending could be minimal. “With interest rates remaining high, recovery is pushed to FY26,” Pokharna added.

North America accounts for 50-60% of revenue share for a large number of software exporters while BFSI constitutes about 35-40% of segmental share.

“Fed’s decision to sustain interest rates is expected to further slow down the growth for the Indian IT services industry to 1-3% for FY25. Tech and discretionary spending could take longer to recover from the BFSI sector in the US, which accounts for at least 35-40% of $250 billion India’s Tech sector,” said Gaurav Vasu, founder and CEO of UnearthInsight.

Further, he said, delay in transformation or long-term experimental bets, longer decision making cycle for large deals and continued emphasis on cost take out deals are likely to impact outsourcing firms’ revenue growth.

Indian outsourcing leaders will likely have to wait longer, perhaps until the start of FY26, for a revival in business as the US Federal Reserve could keep interest rates elevated in the world’s largest economy to ensure a lasting victory over politically uncomfortable inflation. High real rates could elevate hurdle rates for companies, potentially crimping growth in discretionary technology spends.

“The Fed’s hawkish approach is a double-edged sword. Higher interest rates could lead US clients to curtail discretionary IT spending, impacting revenue growth for Indian firms,” said Hansa Iyengar, senior lead analyst for UK-based IT research firm Omdia.

Even as FY24 earnings showed subdued revenue growth across Indian IT majors, strong deal wins and expectations of technology services demand coming back had renewed business revival hopes in the second half of fiscal 2025 that ends in March next year. Most IT majors however have continued to be cautiously optimistic given the prolonged uncertainty in the industry.

Last week, the US Federal Reserve said the rates will remain ‘high for long’ amid elevated inflation (3.5% in March against target of 2%) dashing the optimism that could have been supported by a rate cut. An interest rate reduction pushes clients to loosen their purse strings and increase tech capital expenditure. Given an election year in the US coupled with ongoing geopolitical uncertainty in the western regions, India’s software exporters may have to bank on the next fiscal year for return of growth.

Global IT giant Cognizant CEO Ravi Kumar S sees the times for IT companies as an “unusual situation”. To an ET query on Fed’s rate decision impact during the post results conference call, Kumar said he sees high interest rates as the reason behind smaller deals and discretionary spends not happening. Without clearly stating the impact, he said, “Our clients are continuing to watch this because signalling any of this (change in rates) will also lead to change in the discretionary spend.”

Deals execution could also be dented if outlook doesn’t improve amid ongoing global war uncertainty and if pressure increases on commodity prices.

IT veteran and former Wipro CFO Suresh Senapaty said the interest rates will impact in the short term as companies will continue to remain watchful of their spending. Delay of a Quarter?

“Although, there is clearly a pent up requirement for tech services among enterprises but that will happen as soon as outlook improves on interest rate signs. Maybe this Fed move can prolong decision making by a quarter or so,” he said.

“Under such circumstances, demand will not revive, and enterprises will want to save every penny. Companies will wait for clarity. This is also a reason why despite reporting strong TCV (total contract value) numbers (of deals in Q4FY24), most revenue guidance still continues to be low and therefore deals may not translate into revenues as they may get rescoped or shelved,” Kotak Securities’ vice president Sumit Pokharna said.

In the last fiscal year ending March 2024, IT majors Tata Consultancy Services (TCS), Infosys and HCL Technologies (HCLTech) reported revenue growth in constant currency (CC) terms at 3.4%, 1.4%, 5.0%, respectively, while Wipro and Tech Mahindra’s revenues declined by 4.4% and 5.4%, respectively.

For FY25, Infosys projects overall revenue to grow 1-3% in constant currency terms, while HCLTech expects 3-5% revenue growth. Wipro, which provides quarterly guidance, estimates April-June quarter revenue to be between negative 1.5% and positive 0.5% at best. TCS does not give guidance and Tech Mahindra said FY25 will be better than FY24.

Joseph Anantharaju, executive vice chairman and CEO at mid-sized lender Happiest Minds Technologies said that if the inflation is in reasonable limits, it (rates) shouldn’t impact. “…because if the inflation levels go up significantly, then you have issues in terms of your margin pressure and other things. But as long as it ranges around 3-3.5%, if that’s maintained at that level, it shouldn’t have much of a bearing.”

BFSI Demand Revival

Moreover, a large part of IT firms’ revenue comes from banking, financial services and insurance (BFSI). This suggests that if interest rates remain high, banks’ business continues to remain weak and their technology spending could be minimal. “With interest rates remaining high, recovery is pushed to FY26,” Pokharna added.

North America accounts for 50-60% of revenue share for a large number of software exporters while BFSI constitutes about 35-40% of segmental share.

“Fed’s decision to sustain interest rates is expected to further slow down the growth for the Indian IT services industry to 1-3% for FY25. Tech and discretionary spending could take longer to recover from the BFSI sector in the US, which accounts for at least 35-40% of $250 billion India’s Tech sector,” said Gaurav Vasu, founder and CEO of UnearthInsight.

Further, he said, delay in transformation or long-term experimental bets, longer decision making cycle for large deals and continued emphasis on cost take out deals are likely to impact outsourcing firms’ revenue growth.