Why IT shares are falling despite rupee hitting record lows

Shares of IT firms have lost ground despite the rupee slipping in the last five sessions. Usually, rupee and IT stocks share an inverse relationship. When rupee falls, IT sector stocks rise on prospects of increased earnings since most of them deal in outsourcing of business from overseas clients and earn in dollars. On the other hand, when rupee rises, IT shares fall.

However, this time, the fall in rupee has been accompanied by a decline in IT stocks.

The rupee, which closed at 79.25 to the dollar on July 8 has fallen to 79.92 today, losing 67 paise during the period amid a stronger greenback in the overseas market. An expected fall in the current account deficit and FIIs outflows have also led to weakening of sentiment around the local currency.

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Overseas, a rise in US inflation has led to prospects of more rigorous rate hikes by the Federal Reserve, leaving room for further strengthening of dollar.

US consumer prices rose in May as gasoline rates reached a record high and food costs climbed, leading to the largest annual increase in nearly 41 years. The high inflation indicated the Federal Reserve could continue with its 50 basis points interest rate hikes through September to tame inflation.

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On the other hand, IT stocks have been falling since July 8. The BSE IT index, which closed at 28,798 on July 8, fell to an intraday low of 26,985 losing 6.29 per cent or 1,813 points during the period.

At 11:37 am, the index was down 126 points at 27,041. The BSE IT index has lost 28.55 per cent this year.

The Nifty IT index was also trading in the red today, down 141 points to 26,381.

Analysts said the Q1 earnings downgrade by brokerages have negated all gains for IT stocks due to a falling rupee. Concerns of global recession have also impacted the sentiment around IT stocks.

Chirag Kachhadiya, Lead IT Analyst, Ashika Group said, "Street worried about elevated attrition number which yet not started cooling off , fear of global recession , global tech spend cut and possible second and third level effect of Russia-Ukraine war in Continental Europe and UK. Subcontractor costs and travelling costs started inching up and eating operating margins of players.  IT sector is passing through a challenge of talent shortage and retention.

Topline is not a challenge for the sector for the next 2-3 years but due to so much work available, employee retention become difficult. Rupee depreciation has always proven positive for the sector, but this time concerns with respect to global recession, attrition risk , rising sub-contractor and travel costs weighing more on sector than positive things like strong revenue visibility and rupee depreciation."

Angel One said, "Indian IT stocks are seeing continued correction which was initially led by rich valuations and expected slowdown in the IT spends given the high inflation and slowdown in global growth. Although most commentaries were/are suggesting that the demand environment is strong, there are some signs of slowdown on sequential basis owing to ongoing macro concerns which over the period may have impact on IT budgets. As the IT sector valuations are still at premium despite the correction, news flows like 'lowering of IT growth forecast' ought to have an impact on the Indian IT stocks. Moreover, the Indian IT sector also gets impacted by Nasdaq movement which in 2022 YTD and even the past week continues to trend lower."