US Fed Chair Jerome Powell-led rate-setting panel will announce the decision on the benchmark interest rate today, after a two-day Federal Open Market Committee (FOMC) meeting.

With the US Federal Reserve all set to announce its interest rate decision on Wednesday and per experts and economists, a rate cut is almost certain, a report by JM Financial said that it will have a benign impact on the corporate balance sheet. US Fed Chair Jerome Powell-led rate-setting panel will announce the decision on the benchmark interest rate today, after a two-day Federal Open Market Committee (FOMC) meeting.

“Fed rate cut is almost a certainty now. Its impact on the IT Services sector, we believe, could be three pronged – a) lower cost of equity driving up stock multiples; b) discretionary demand revival as economy recovers; and c) lower interest burden on corporates opening up room for higher opex (hence IT Services),” the report stated. While the first one has already played out to an extent, the second one is contingent on the economy’s landing variety (soft/hard) and hence still fuzzy at this stage. The last factor – lower interest burden – is the most tangible impact of lower rates, said JM Financial, which is why it is important to delve deeper, and the brokerage firm analysed leverage, interest expense and opex movement of S&P500 companies (ex-financials) through the latest rate hike cycle. 

JM Financial zeroed in on the three trends: a) trajectory of interest cost increase for corporates across sectors has been far gradual than that of fed-rate; b) most sectors/sub-sectors have de-leveraged, albeit marginally, over the past four years; c) opex – as a percentage of revenue – has trended down across sectors. The trends suggest that corporates optimised debt and operations to cushion the higher interest cost.

Empirically, the start of the Fed-rate cut cycle has coincided with a slowdown in IT services exports. Per JM Financial report, two factors explain this. “One, prior rate-cut cycles were preceded by a strong demand upcycle. Two, the US economy went into recession as rates peaked. Current cycles differ on both accounts. We are likely coming out of the spend normalisation phase. Probability of a recession is relatively lower too. While recent unemployment print does raise fear, impact on already optimised IT services spend might be limited. Incrementally, things should therefore improve, albeit gradually, in our view,” it said.