Infosys and Wipro’s American depositary receipts (ADRs) — a special security representing foreign companies on Wall Street — jumped late on Wednesday (local time in India) as investors awaited the outcome of the Fed’s September policy review, due later in the day.
The receipts jumped as much as 3.5 per cent.
The Federal Reserve is widely expected to announce a reduction of 25 basis points in its upcoming policy statement, due at 11:30 pm India time.
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Fed rate cuts and tech stocks
A Federal Reserve rate cut typically tends to push American tech stocks higher, as lower discount rates boost valuations in anticipation of lower borrowing costs.
This happens because growth-oriented technology companies — for instance, the FAANG companies — often derive the lion’s share of their value from long-term earnings projections.
A Fed rate cut lowers the risk-free interest rate usead to discount those future earnings to their present value. This is what tends to lift their stock valuations, rendering these securities more attractive to investors.
Many technology companies also rely on borrowing to fund expansion, R&D and innovation. This is where lower interest rates come into play, reducing their borrowing costs.
Lower borrowing costs can improve their profitability and growth potential.
A Fed rate cut usually stimulates the economy by lowering borrowing costs for consumers and businesses, leading to increased spending on technology products and services and benefiting tech companies.
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Infosys and Wipro on Dalal Street
Earlier on Wednesday, Infosys and Wipro shares rose 0.8 per cent and 0.1 per cent to close at Rs 1,523 and Rs 254.2 apiece on BSE, respectively, in a Mumbai market that climbed up for a second straight day.
