IT stocks see tactical rotation as banking fatigue triggers sector shift: Dhananjay Sinha

The Indian IT sector has been through a prolonged phase of underperformance, and according to Dhananjay Sinha from Systematix Group, the recent interest in the space appears more tactical than structural. Over the past 12 to 18 months, the sector has seen significant derating amid concerns over US outsourcing policies and weaker earnings guidance from companies.

As he notes, “That has been the past.” At the same time, market leadership that had shifted towards banking stocks is now showing signs of fatigue as investor conviction weakens. He points out that “People might be now shifting back to IT to some extent,” but adds that this is likely to be a defensive move rather than a fundamental turnaround in the sector’s outlook.

On the macroeconomic front, rising crude oil prices are once again becoming a key inflation driver. With oil hovering at elevated levels, concerns around under-recoveries and pass-through effects are building. Sinha highlights that “At $100 we have seen that crude has actually been hovering around there,” and warns that government price adjustments remain insufficient. He adds that “We think that that is very inadequate,” indicating that further fuel price increases may be needed. The broader implication, he suggests, is that inflationary pressures are likely to persist, with “There will be pass through of higher energy prices on inflation,” and WPI inflation potentially rising beyond current expectations.

Turning to monetary policy, Sinha believes the Reserve Bank of India is facing a narrowing policy corridor. He observes that the central bank may initially overlook inflation spikes, but discomfort will rise if inflation crosses key thresholds. “The RBI will actually try to look through the initial surge,” he says, but cautions that “They will actually get more uncomfortable is when it starts going beyond 5%.” In his view, real interest rates could turn negative if inflation stays elevated, which would eventually force the RBI to consider rate hikes. He also flags currency pressure as an additional constraint, noting that “We do anticipate the rupee actually weakening quite sharply,” while RBI’s capacity for intervention may be diminishing.

On the broader macro narrative, Sinha challenges the long-held “Goldilocks” view of the Indian economy. He argues that rising energy-driven inflation will gradually feed into production costs, consumption, and corporate earnings. As he puts it, “We think that with an increase in cost inflation because of the elevated energy prices…” and this will impact “the overall spending power.” The result, he suggests, is a shift away from the idea of strong growth with low inflation toward a more difficult environment of slower growth and higher inflation. “There will be a slow growth and higher inflation,” he says, adding that “That is what we think as a stagflationary situation.”

Overall, the commentary paints a picture of a market and macro environment in transition, where sector rotation is being driven more by defensive positioning, while inflation, currency dynamics, and policy constraints increasingly dominate the outlook.