European and US banks will move more IT work to cheaper countries to cut budgets, according to the head of Infosys, the Indian software giant.

The move could herald further job cuts in the City. Wages for computer programmers have spiralled upwards in London in recent years amid fierce competition among banks and a dearth of domestic talent. The trend helped fuel a 6 per cent rise in global spending on IT by banks last year, to an estimated £170 billion. Lower-skilled call-centre work may also be affected.

Kris Gopalakrishnan, the chief executive of Infosys said: "Lots of budgets that are being finalised are flat; some are down … the declines are in single digits."

Budget decisions are being delayed as firms across all sectors tighten spending and decide whether they can make do without upgrading the technology that underpins their businesses, he added. Those banks where leading executives have been forced to step down in the wake of the US sub-prime crisis are being especially indecisive, he said.

Mr Gopalakrishnan said that banks had already given notice to his company that they intend to shift more labour to India, where wages, although rising fast, are still well below Western levels.

"Clients are telling us, 'we will require more support, don't reduce your hiring' … We expect that offshore will get a higher percentage allocation of spending," he said.

The financial sector, the largest user of IT, accounted for about a third of Infosys's revenues of $3 billion last year.

The banking slowdown comes at a bad time for the Indian IT industry, which is already battling the effects of the rupee's sharp appreciation and wage inflation expected to run at between 12 per cent and 15 per cent this year.

The sector will also soon face an estimated $1 billion-plus bill when a holiday on export taxes on software lapses, a move that will increase Infosys's effective tax rate to about 22 per cent from about 15 per cent.

TCS, the market leader, recently said it was "cautiously confident", but only because it also believes that Western clients will move more business offshore to cut costs.

Groups such as Infosys now face having to revisit their plans to move away from low-margin business process outsourcing (BPO) work, such as running call centres towards high-end consulting contracts. "Discretionary spending is now rare," Mr Gopalakrishnan said.

Fears that fallout from the US sub-prime crisis is set to hit India's shores have been mounting since the new year. In recent weeks, IBM and TCS have both axed hundreds of underperforming workers, while TCS also cut bonus payouts to workers in the first time in its history.

In January, the four largest Indian IT houses – TCS, Infosys, Wipro and HCL Technologies – posted average sales growth for the third quarter of just over 21 per cent, sharply down from more than 50 per cent a year earlier, the point at which the rupee's rise began in earnest.

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