There is scope to push for bigger technology spending by companies in tight labour markets. There is also a question mark over the severity of recession central banks are willing to countenance. A mild winter has cushioned the energy crisis Western economies were gearing up for. If the near-term effects are not pronounced, the medium-term outlook for Indian IT services improves significantly. Enterprises will seek productivity gains in an environment of higher borrowing costs, and exchange rate movements could make Indian IT services exports more competitive. Technology hiring in India is coming off its pandemic peak, which improves the immediate outlook for the IT industry’s margins, but signals weakness in the longer term.
IT services are likely to be a transmission mechanism of recession in the US and EU to India, so the markets have reason to be guarded. Combined with turbulence in financial flows and a prolonged period of high credit costs, India is in a vulnerable position given the concentration of its services exports. Indian equities have outdone global markets so far, but the weight of the IT industry in headline indices could lead to an increase in volatility. Infotech sub-indices have a stronger correlation to US equity valuations than the broader Indian market. Finance and technology will provide the market its cues.
