According to reports, two of the top four Indian IT companies, HCLTech and Wipro, are seeing an uptick in discretionary spending in banking, financial services and insurance (BFSI) compared to a few months ago, a pleasant surprise for the IT industry.

HCLTech told analysts last week about increased discretionary spending at BFSI, even as cost-takeout deals drive other verticals.

In the April-June quarter, Wipro also saw a surge in Capco Consulting, focusing primarily on BFSI clients and discretionary spending.

Experts expect the return of discretionary spending to be widespread in the next two quarters as they anticipate that interest rate cuts will be implemented soon. Clients have already hired consultants to discuss next year's budget and make decisions about discretionary spending.

Compared to a few months ago, discretionary spending by banking clients has increased somewhat. Most other industries remain status quo, and demand there is still driven by cost optimization deals, as per reports.

Importantly, HCLTech's financial services division was affected by the insourcing of one of its clients, State Street, in the June quarter; HCLTech expects the impact of this divestiture to continue in the current quarter.

“If you look at the BFSI segment, specifically if you look at Capco (consulting firm), we are seeing growth coming from both Europe and the US,” Wipro CEO Srini Pallia says.

Unlike the country's third- and fourth-largest IT services firms, discretionary spending is still largely avoided, as noted in the first-quarter results of rivals TCS and Infosys. But green shoots are giving experts hope for a resurgence.

Avinash Vashistha, chairman of Tholons, expressed high confidence in an impending US Federal Reserve rate cut in September, citing the current economic conditions, progress on inflation and recent commentaries by the Fed.

“A reduction of at least a percentage point in 2024 is highly anticipated. Clients are already proactively engaging with consultants to discuss next year’s budgets, with a particular focus on discretionary spending allocated towards AI (artificial intelligence) and digital transformation initiatives. I foresee a broader increase in discretionary spending across various verticals and companies, commencing from the fourth quarter of this fiscal year, which coincides with the first quarter of the next calendar year for most clients,” says Avinash.