India’s battered information technology stocks may see a turnaround in fortunes from early next year due to interest rate reduction from the US Federal Reserve, a top CLSA strategist said.

Fed rate cuts will be good for US economic growth and India’s IT sector, Vikash Kumar Jain, head of research and strategist at CLSA India, told NDTV Profit.

“We went overweight on IT a few months ago. We were not able to predict how India-US relations could worsen. With a couple more Fed rate cuts likely going into the end of the year, there is a likelihood that this sector comes back into action,” he said.

The Nifty IT index, a gauge of India’s 10 top companies, has plunged more than 6% in the last three months as Washington ramped up pressure on India with a 50% tariff. The US is the top market for Indian software exporters, and even though the tariff applies to merchandise goods, the market sentiment was dented.

The Federal Reserve’s indications about possible interest rate reductions have significant implications for Indian markets, particularly for IT companies that heavily rely on the US market for their revenue. When interest rates rise in the US, it typically leads to reduced consumer expenditure and lower corporate investments, which can negatively impact the growth prospects of Indian IT firms.

The IT sector has consistently shown sensitivity to broader US economic trends and monetary policy decisions.

This fall in IT stocks has made their valuations “palatable”, Jain said.