Amid lingering uncertainty, does US rate hike herald better days for Indian IT?

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Those who track India’s top IT companies closely, like hard-nosed fund managers, usually agree that when the US Federal Reserve raises interest rates in that country, the world’s biggest technology market, it is good news for the outsourcing service providers.

The one hike that America’s central bankers implemented unanimously in December 2015 augurs well for Indian IT because it means that the top US monetary policymakers had a reasonable expectation that the worst was behind us.

Recent commentary by the Indian IT industry's top executives also points in that direction. Infosys, for instance, is approaching large contract wins each quarter that add up to $800 million to $900 million over the life of those contracts, CEO Vishal Sikka told analysts and investors at Morgan Stanley last month.

The optimistic scenario is something like this: “As long as the US sees 2 percent growth or more, it’s broadly okay,” a Mumbai fund manager told Forbes India on condition of anonymity as his company prohibits him from talking to the media. “It depends on what kind of investor you are: If you’re expecting IT volumes to grow in the high single digits or low double digits, then a 2 percent growth in the US won’t be enough.”

“I’m in the camp where as long as you see 3-4 percent growth in IT spending, it should be okay. And we’re not even talking about the impact of social mobility, cloud and all those things.”

The fund manager explained that such a growth in spending on IT outsourcing will imply even greater increase in offshoring and, coupled with some currency advantage, an Indian IT industry that could grow at 12 percent — the upper bound of what industry lobby Nasscom is projecting for exports in the current April-March fiscal year — is certainly worth investing in.

“And if you find a company that is outperforming its peers, throw in higher utilisation — the top IT companies are all working towards ‘zero bench’ — the bottom line could grow even faster.”

The flip side is, on the other side of the pond, uncertainty continues to loom large and European central bankers are still holding on to a negative interest rate scenario. In an increasingly connected world, no one really knows what that means for the future, and don’t even start about the Panama papers.

Last Thursday, Gartner Inc revised its forecast for worldwide IT spending for this calendar year to project a 0.5 percent decrease over last year’s spending to $3.49 trillion. The previous forecast, at the beginning of 2016, was for a 0.5 percent increase over 2015 to $3.5 trillion, and Gartner added that the latest forecast is largely owing to currency fluctuations.

The fund manager in Mumbai could still be largely right: Within the overall tech spending, which is set to be virtually unchanged, the IT services component is projected to grow by 2.1 percent to $929 billion this calendar year over 2015, a year in which it shrank by 4.7 percent, according to Gartner. “I’m pretty sanguine about it,” were his parting words.

The thoughts and opinions shared here are of the author.