How US Fed’s Rate Cut Could Lift BFSI Growth For Indian IT Sector

India's $250-billion IT services sector is expected to see a rebound, with the banking, financial services, and insurance (BFSI) vertical projected to achieve over 500% revenue growth by fiscal 2026, following global policy changes.

According to industry experts, BFSI, a key vertical driving the Indian IT sector, could return to positive growth in the current fiscal year after experiencing negative growth in the previous year.

"The recent US Fed rate cut is positive for the IT industry, as discretionary spending is likely to resume. The first effect of the rate cut will be on the BFSI sector, which is expected to grow 6-7% by fiscal 2026, from a negative 1.5% in fiscal 2024, for leading IT service providers," said Pareekh Jain, chief executive officer of Pareekh Consulting.

This growth is expected to improve the outlook in the North American region, further benefiting BFSI growth. In September, the US Fed reduced its key interest rate by 50 basis points to 4.75-5.00% for the first time in over four years.

Companies in the US and Europe will begin their new budget cycles at the start of the calendar year, with a positive impact expected in the fourth quarter for IT companies. The second half of fiscal 2025 is anticipated to be stronger than the first half, as reflected in Accenture’s recent guidance, Jain added.

The BFSI sector had reduced tech spending for several quarters following the collapse of Silicon Valley Bank. Uncertainty over US Fed policy and upcoming elections led to BFSI clients delaying budgets, resulting in a year-on-year decline in BFSI growth since fiscal 2022-2023 for many Indian IT companies.

Initially, BFSI growth will pick up, along with the telecom sector, which is already seeing an increase. This will extend to capital-intensive industries such as manufacturing and utilities as enterprises make more investments. Overall, the North American region is expected to experience positive growth. The resolution of US elections is likely to bring greater predictability and stability, Jain noted.

BNP Paribas echoed this in a report, saying, “The US Fed rate cut is expected to improve the capex outlook for enterprises and act as a catalyst for the growth cycle in the IT services industry. As we approach the next budgeting cycle, there is far greater certainty than in the past two years.”

The broader outlook is also improving as inflation appears to be under control. The US elections will conclude by year-end, and elections in key European economies are already over, except in Germany, where elections are due next year, according to BNP Paribas.

JM Financial Ltd., in a recent report, said that the impact of the US Fed rate cut on the Indian IT sector could be threefold: lower equity costs driving up stock multiples, revived discretionary demand as the economy recovers, and lower corporate interest burdens opening up room for higher operating expenses.

The report added that historically, the start of a US Fed rate-cut cycle has coincided with a slowdown in IT services exports. This is because previous rate-cut cycles were preceded by strong demand growth, and the US economy entered a recession after rates peaked. However, the current cycle differs on both counts, suggesting the sector may exit its spending normalisation phase.

“While concerns about a recession remain, the impact on optimised IT services spending could be limited. We expect gradual improvements moving forward,” the report noted.

However, HFS Research, in a recent blog, pointed out that the US Fed rate cuts may not lead to a full recovery for the IT services industry, as various factors will influence outcomes over the coming years.

“Not all IT service providers will benefit equally from the rate-cut cycle. How companies respond to headwinds and tailwinds will determine the future of IT services,” the blog read.

Tailwinds for the IT industry include the push for enterprise innovation, rising demand for AI, cloud transformation, cybersecurity, and cost-cutting pressures, which will boost outsourcing. Headwinds include volatile currencies, ongoing economic uncertainty, US election outcomes, wage inflation in India, and increased competition, the blog added. The impact of AI on service delivery and interest in global capability centres could also reduce traditional outsourcing demand.

The Indian IT sector is preparing to announce its second-quarter earnings, with Tata Consultancy Services Ltd. starting the reporting season on 10 October. Both large and mid-sized companies are expected to report better revenue growth than in the first quarter, as macroeconomic challenges ease and demand revives.