Weak rupee could pave the way for a long-awaited IT recovery

The rupee hit an all-time closing low of 87.57 to the dollar earlier this month as improving prospects of the US economy gave the greenback a boost. So far in 2025, the rupee has declined by 1.3% against the US dollar, 1.4% against the euro, and 1.8% against the British pound.

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From a macro perspective, a sinking rupee spells trouble, mainly for importers, but India’s IT firms are exporters of services and a large part of their revenue is denominated in these currencies. So, a depreciating rupee tends to augur well for the sector’s revenue growth and margin outlook.

Pole position

LTIMindtree Ltd, Wipro Ltd, Sagility India Ltd and Coforge Ltd are best placed to benefit from this, given their higher exposure to the dollar, euro and pound, and higher offshore employee mix, said Jefferies India in a report on 18 February. 

To factor in foreign exchange movements, Jefferies has upgraded FY26/27 earnings-per-share estimates for IT stocks under its coverage by 2-5%. Since 2011, IT stocks have outperformed Nifty when the rupee has depreciated sharply against the dollar, euro and pound, said the brokerage. So, if the recent foreign exchange trends continue, IT stocks could outperform Nifty yet again in 2025.

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So far in FY25, the Nifty IT index is up around 17%, outpacing the Nifty50’s mere 2% rise. The sector’s December quarter (Q3Y25) earnings reflected the impact of seasonal furloughs, but management commentaries indicated deal pipelines were robust. importantly, green shoots are emerging on discretionary spending, mainly in the key banking and financial services vertical in the US. Plus, pain is bottoming out in the retail vertical.

Hey, big spender

An analysis by Nirmal Bang Institutional Equities showed the technology spends of six large US banks hit an all-time high of $9.5 billion in the December quarter (Q4CY24), rising 4% sequentially and 5% year-on-year. Banks are self-funding their increased technology spending through earlier investments in automation and efficiency. 

“This trend suggests a potential upward movement in discretionary deal wins and mega-deals, expected to materialise in CY25. Other verticals are anticipated to follow a similar trend, with some lag,” said the Nirmal Bang report dated 18 February.

Indian IT companies are also seeing traction in demand for artificial intelligence (AI) and GenAI-driven services, and are investing in GenAI capabilities and launching multiple platforms. GenAI adoption can be expected to gather pace in the next 12-18 months, and lead to improved demand for cloud services and data standardisation.

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For large-cap IT stocks under its coverage, Nomura expects revenue growth to increase from around 2.8% in FY25 to around 5.7% in FY26. “We believe FY25F will likely mark the bottom of revenue growth for India IT companies. While a strong recovery of discretionary demand may take a few quarters, it is unlikely to worsen further, in our view,” said a Nomura Global Markets Research report on 19 February.

As things stand, demand-led concerns are abating for the sector. However, uncertainty around the quantum and frequency of interest rate cuts by the US Federal Reserve and potential tariff wars could hurt near-term sentiment and delay revenue recovery for IT companies, so valuations need to be more reasonable. Besides, weakness in the manufacturing and telecom sectors needs to be monitored.