The Indian IT sector is slowly getting back on track. What is driving the change?
In 2022, the IT sector saw a deep underperformance compared to other sectors. Yes, Nifty Media and Nifty Reality were also experiencing a similar trend. However, it was Nifty IT that suffered a tremendous setback in 2022. But, the underperformance was justified as it had faced several challenges during that time.
But now, it seems the tables have turned, and Nifty IT is shining brighter than Nifty 50.
In the past month, as of 2nd June 2023, Nifty IT has surged by an impressive 4.80%, surpassing the 2.066% growth observed in the Nifty 50.
So, the question is, has the tide turned for the Indian IT sector?
Well, let’s find out.
While most sectors struggled during the pandemic, the IT industry beamed brightly. As businesses scrambled to adapt to remote work, the IT sector was crucial in digitising processes and enabling smooth operations from home. This sudden surge in demand led to a rapid expansion of IT companies, which eagerly hired large numbers of employees.
However, the post-pandemic landscape brought its own challenges. Rising inflation and tightening monetary policies caused businesses to tighten their belts and scale back on IT investments, leading to layoffs and a significant decline in the IT sector.
But, after a lot of struggles, good things are finally coming the IT sector’s way means of increased margins and the US Fed’s cautious approach.
What is Fueling the Recovery of the IT Sector?
Firstly, the fortunes of the Indian IT sector are closely intertwined with the United States and Europe’s economy, where the majority of Indian IT services are in demand.
According to the US Labour Statistics, the recent US unemployment numbers have hit a 50-year low of 3.4%. Also, inflation has slimmed down. Lastly, the US Fed has indicated a cautious approach to rate hikes after the US banking crisis. This cautious approach will benefit the IT sector as they will have more capital in their hands.
According to Moneycontrol, the layoffs have yielded some positive outcomes for tech companies, as unfortunate as it was. The reduction in employee costs has provided much-needed support to their profit margins.
Potential Risks Which Could Weigh The IT Sector Down
As the Indian IT sector is closely intertwined with the US economy, any stress in the US can impact the Indian IT sector. For example, as the debt ceiling is extended, the US will have to issue more treasury, and these treasuries will be purchased by the private sector, which may suck the liquidity from the economy and may impact the IT sector.
Similarly, inflation and the after-effects of the banking crisis are a risk for the US economy, which weigh down the IT sector.
The IT sector, ever-evolving and dynamic, faces external risks that make predicting its future challenging. Will it shine with opportunities or bear the weight of risks? Only time will tell.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not investment advice.