The tech sector continues to be in the eye of the storm. Even as the narrative about a rapid AI-led disruption seems to be easing, the recent spike in the US 10-year yield is now threatening to put a spanner in the works. The US benchmark yield has hardened to nearly 20-year highs and analysts see this as a meaningful headwind for IT stocks in India.
The hardening of yields is bad news for markets in general, but there are some sectors that are particularly vulnerable. The Indian IT sector may not have a direct impact like banking or financial but most analysts believe that higher yields may cut down discretionary tech spending by clients. Capital outflows is another key worry
Steep US yield a growing headwind for tech sector
The US 10-year yield broke meaningfully beyond the 5% mark. This is the highest level since 2007, surpassing the earlier 2023 peak. While most of this move is in anticipation of what the US Fed may decide, it also raised concerns about the global outlook going forward.
One must understand that the implications of spiking yields are not just limited to government borrowing costs. It also has the potential to impact businesses and consumers and thereby limit corporate earnings growth.
Sumit Pokharna, SVP Fundamental Research, Kotak Securities, highlighted that, “in general, higher interest rates are negative for corporates, as it impacts their capex plans. Higher borrowing costs can make US companies more cautious about discretionary spending, including technology transformation, consulting and large IT projects. We believe it will negatively impact the IT sector also.”
Uttam Kumar Srimal, Deputy Head – Fundamental Research, Axis Direct added that the US 10-year yield sustaining above the 5% mark “is a near-term headwind for Indian IT, mainly because higher borrowing costs can make US companies cautious on discretionary technology spending.”
Tech sector: Risk of further valuation compression
The US yield staying elevated, especially above the 5% mark is bad news for another reason. Experts flag the risk of compression in valuation and overall cash flows. “The key point is that Indian IT is not directly sensitive to the US 10-year yield in the way banks or financial companies are. The impact is primarily through valuation, US technology spending, the dollar, and global risk appetite, Pokharna added.
According to Pokharna the yield sustaining above 5% “would therefore be a meaningful headwind for IT stocks, particularly for high-valuation names. When the 10-year yield rises, the discount rate used to value future cash flows increases.”
Uttam Srimal pointed out that “If US yields move materially above 5%, IT stocks could face further valuation compression even without a major earnings downgrade. However, stabilisation in yields, improving US tech spending and sustained large deal wins could trigger a recovery.” He highlighted that they “prefer selective accumulation of quality IT companies at attractive valuations rather than aggressive sector-wide buying.”
Outlook on the IT revenue, new deal wins for rest of FY27
Even as the market is grappling with the possible implication of the elevated US yield on tech sector, the broader AI debate continues for the IT services sector. Though the narrative seems to have shifted from existential risk to who in the value chain captures value.
Experts believe that AI-led deflation will, however, constrain meaningful growth “beyond 4-5% up to FY28,” as Pokharna pointed out.
Uttam Kumar Srimal of Axis Direct is “cautiously positive on FY27 IT demand. Large deal wins, cost optimisation, cloud, cybersecurity and AI-led transformation should support growth, although discretionary spending and traditional services may remain moderate. Deal TCV should remain healthy but somewhat lumpy.”
Pokharna elaborated how “AI has intensified competition among Indian IT services companies. Margin pressure should have followed, but currency depreciation has cushioned. Another six months of undisciplined pricing could make the margin pressure visible, as the old book comes up for renewal.”
He listed out four themes that have emerged from the recent chain of events even as the market prepares for the Q2 results in a few weeks from now. According to him, “High pricing pressure as deals remain insufficient to support growth aspirations. Concerns related to the terminal value of IT services have reduced.”
He pointed out that “the debate between open-source & closed models continues, and open-weight models not only raise service intensity but also lead to faster adoption, driving deflation.” He believes that “Challengers will continue to gain wallet share.”
Impact of yield spike to be material if rates sustain above 5%
Most market observers and tech sector analysts believe that the challenges of the US yield sustaining above 5% could be material, especially for valuation and discretionary spending by clients. However, AI has intensified competition in the Indian IT space, and one can’t assess the impact in isolation. Deal wins can be lumpy going forward.