Infosys, TCS, other IT stocks in focus after first Fed rate hike in 3 years. Will inflationary pressures offset anti-AI euphoria?

Shares of Indian IT companies, including Infosys, Tata Consultancy Services (TCS) and others, will remain in focus on Thursday after the US Federal Reserve announced its first interest rate hike since 2023, with officials expecting one more increase later this year.

The American central bank’s Federal Open Market Committee (FOMC) announced the decision after a two-day meeting, increasing the benchmark interest rate by 25 basis points to a range of 3.75%-4%. This follows consumer inflation staying at 3.4% in August, the same as last month but still well above the Fed’s 2% target. Inflationary pressures were further intensified by soaring energy prices amid renewed tensions in the Middle East.

Also read | A 25 bps hike: US Federal Reserve raises interest rates for first time since 2023


"There are no immediate signs for inflation to ease, especially given the stalemate in the Middle East. This means the Fed may need to continue to tighten to achieve its target," Tai Hui, APAC chief market strategist at JP Morgan Asset Management, was quoted as saying by Reuters. Traders are now expecting a 50% chance of another Fed hike next month to rein in inflation. A total of three rate increases have been priced in for this tightening cycle.

The Indian IT companies derive a major portion of their revenue from their US clients. Hence, higher US interest rates and subsequently lower discretionary spending expectations often spook IT investors.

Global AI selloff impact

This comes after the IT stocks saw a sharp surge earlier this week after OpenAI and Anthropic leaders called for a slowdown in AI development to manage risks and protect humanity, boosting sentiment for the tech stocks on Dalal Street. Anthropic CEO Dario Amodei, in a long X post on Saturday, ‌called on AI companies to slow the rate at which they advance model capabilities amid mounting fears of misuse of artificial intelligence. The Anthropic CEO wrote that in nearly a year, AI agents "could be capable of taking over the entire internet, potentially causing hundreds of billions of dollars in damage." World’s richest man Elon Musk, who runs xAI and OpenAI CEO Sam Altman said they agree with Amodei.

Also read | Infosys, HCLTech, TCS, other IT stocks soar up to 6%; Nifty IT rallies 5% as global AI slowdown calls boost sentiment

HSBC earlier this year said India can serve as an “anti-AI” diversifier as sharp swings in technology-exposed markets encourage foreign investors to broaden their portfolios. “Any narrative around regulatory restrictions on the use of AI may actually have a positive influence on Indian IT stocks, Bloomberg quoted Deven Choksey, managing director at investment advisory firm DRChoksey FinServ. “When the narrative shifts from unchecked development to regulated and responsible use of AI, short-covering backed by fresh buying in frontline IT stocks is quite possible,” he added.

What analysts are saying?

The Federal Reserve’s 25-basis-point rate hike, taking the federal funds target range to 3.75-4%, marks a renewed shift towards tighter monetary conditions as inflation remains elevated, said Rajesh Palviya, Head of Research at Axis Direct. The Fed has also highlighted resilient domestic spending, strong productivity and robust capital investment, suggesting that the US economy currently has sufficient strength to absorb higher rates, he added.

“For the global economy, the immediate impact is likely to be higher-for-longer expectations, keeping U.S. Treasury yields and the dollar firm and putting pressure on risk assets, particularly high-valuation equities and emerging markets. The key market trigger now will be the Fed’s guidance on the possibility of further hikes rather than the 25-basis-point move itself,” the analyst said.

In the near term, equity markets may remain volatile, with rate-sensitive and richly valued segments facing pressure, Palviya said, adding that markets could then gradually shift focus back to domestic earnings and growth if oil prices stabilise and the Fed signals a limited tightening cycle.

Also read |Dalal Street faces a double whammy of Fed rate hike, soaring bond yields. Are Sensex and Nifty heading for a bigger crash?

Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.