Explained: Why IT stocks faced profit booking ahead of US Fed rate decision

MphasiS led the decline, dropping 5.6%, followed by L&T Technology Services, Persistent Systems, Tata Consultancy Services, HCL Technologies, and Tech Mahindra, which saw losses ranging from 3% to 4%.

In Short

• Nifty IT index declines over 3% amid profit booking
• MphasiS leads declines, falling 5.6% among IT stocks
• Anticipation of US Fed rate decision triggers decline

Domestic IT stocks witnessed a sharp sell-off on Wednesday, pushing the Nifty IT index down by 3.05%. This marked a roughly two-week low for the index, as all 10 constituents faced significant losses.

MphasiS led the decline, dropping 5.6%, followed by L&T Technology Services, Persistent Systems, Tata Consultancy Services, HCL Technologies, and Tech Mahindra, which saw losses ranging from 3% to 4%.

Major players like Wipro, Infosys, Coforge, and LTIMindtree also recorded declines between 1% and 3.1%. As a result, the Nifty IT index has lost 2.02% in September so far.

What drove the IT sector decline?

The sell-off in IT stocks is primarily due to profit booking by investors following a strong rally in recent months.

Since June, the Nifty IT index surged by 32%, closing positive for three consecutive months.

Investors, now seeking to lock in gains, are taking profits ahead of the US Federal Reserve's expected rate decision on Wednesday, September 18.

The anticipation of a potential rate cut by the US Fed, driven by easing inflation and a cooling labour market in the US, has contributed to this profit-taking.

The IT sector slump weighed on the broader market, with key players like Infosys, TCS, HCL Tech, and Tech Mahindra dragging down the Nifty 50 index. However, support from financial stocks helped prevent steeper losses in the overall market.

It is worth noting that markets have already priced in a 25-basis-point rate cut, but some expected a 50-basis-point reduction, which could have sparked a stock rally.

Hareesh V, Head of Commodities, Geojit Financial Services, said, “There are expectations of a 25-50 basis point cut in rates in today’s meeting.”

“The recent economic releases from the US do not suggest a super-sized rate reduction but signs of waning economic activity could push the US central bank to act aggressively to support the economy,” he added.