The Brexit will have a range of implications for Indian IT sector. The impact is likely to be two-pronged, based on currency movement and possible business slowdown in the UK and Europe. Any weakness in the GBP and EUR relative to the INR would be a negative due to exports to Europe. However, sharp currency swings on the day following the referendum are unlikely to have a significant impact on overall FY17 earnings for the sector. This is because weakness in the GBP and EUR is offset by the corresponding INR weakness vs the USD. Moreover, even accounting for weakness on June 24, the average EUR-INR rate during 4Q16 is actually favourable for most of the IT companies. Even in an adverse scenario of continued GBP depreciation (HSBC FX forecasts GBP-USD falling to 1.20 by year-end and EUR-USD to 1.1 by the year-end), we calculate the resulting impact on the IT sector’s FY17e earnings to still be negligible, because of the corresponding INR offset.
Historical precedents from the Global Financial Crisis (GFC) suggest IT spending may pause in the near term. On the other hand, tech spending from banks is expected to increase over the next 1-3 years driven by digital technologies and IT systems for changing regulatory requirements. HSBC economics has cut UK GDP forecasts to 1.5% from 1.8% in 2016 and 0.7% from 2.1% in 2017.