India's Forex Reserves

The Federal Reserve’s decision will determine how much gold will move in the future.
Yet tensions are far from over because Wednesday’s Federal Reserve interest rate decision is critical for determining how the largest central bank in the world views the conflict between halting unrelenting inflation and relieving the strain on the entire banking system.

If the volatility in the financial sector deepens, IT firms with substantial exposure to US banking institutions, including as Tata Consultancy Services (TCS), Infosys, Wipro, LTIMindtree, and Cognizant, could suffer.

According to earnings reports, the BFSI sector contributes more than 25% of these IT companies’ income.

Analysts predict that the collapse of major financial institutions may result in a decline in current business as well as future reductions in IT spending and postponed transaction closings.

Effect on Indian IT growth in 1HFY24
According to domestic brokerage company Kotak Institutional Equities, recent developments including the bankruptcies of Silvergate, SVB, and Signature Bank in the US and the UBS-CS merger in Europe are anticipated to have an influence on Indian IT growth in 1HFY24 and lower overall growth for FY2024.

The brokerage sees Wipro and Cognizant as vulnerable, while TCS and Infosys are better positioned.

It anticipates that a slowdown in growth in FY2024 will manifest as a weak March 2023 quarter, a modest recovery in 1QFY24, and a return to normalcy in 2QFY24.

According to the brokerage, less exposure to BFS will have an adverse effect on HCL Tech and Tech Mahindra, and a greater emphasis on cost take-outs will lead to chances for application rationalisation, increased outsourcing, captive carve-outs, enabling automation, and vendor consolidation.

“Among Tier 1 IT, TCS and Infosys are better positioned. Mid-tier companies LTIM and Mphasis stand to gain; the latter, however, would experience short-term difficulties due to excessive exposure to BFS and a substantial exposure to the affected mortgage sub-vertical “It read.

The brokerage also stated that among Tier 1, CTSH and Wipro are vulnerable; the latter’s susceptibility is exacerbated by greater consultancy exposure.

“Further reductions in discretionary tech spending are likely to occur in the near future due to caution among BFS firms in developed markets as a result of recent developments surrounding the bankruptcy of Silvergate, Silicon Valley Bank and Signature Bank in the US, and the UBS-CS merger in Europe “The message read.

“Spending on cost takeouts will increase, but gains won’t start to materialise until 2HFY24 or later, “With anticipating increased growth polarisation between winners and losers in FY2024, it was stated.

“Recent problems in the banking industry can reduce sequential growth in 1QFY24 by 1-2%. This presupposes that the global banking crisis will be resolved quickly and that BFS-specific issues will continue to exist. Our current growth prediction for leaders, i.e., for FY2024E, is 8%; but, the current crisis may reduce that prediction by 1% to 2%. The effects of a full-blown recession will be greater, “It read.

Exposure to BFS
According to Kotak, TCS has a BFS exposure of 29%, CTSH is at 19%, Infosys is at 26%, Wipro is at 27%, HCLT is at 14%, and TM is at 12%, excluding insurance.

For Infosys, Wipro, and CTSH, the corresponding BFSI exposure in Europe was 4.9%, 11.7%, and 6.2%. TCS Europe exposure is estimated by the brokerage to be 13%.

CTSH, followed by Infosys/TCS, has the most exposure to regional US banks. Regional banks are not heavily exposed to TechM and HCLT.

Kotak thinks that a short-term reduction in discretionary spending may cause a pause or slowdown in the pace of digital/cloud activities. Cuts to discretionary spending will have an effect on all businesses.