Mind on the Market

India IT adapts to the AI shift

India’s IT sector is navigating an AI‑driven transition, with near‑term pressure on growth and margins but longer‑term opportunities as firms shift to AI‑enabled, outcome‑based delivery models.

5 min read

Saketh Reddy, CFA

Research Analyst, Investment Strategy & Research

In our September 2025 Mind on the Market, we highlighted India as one of the most heavily tariffed major U.S. trade partners. The India–US trade deal in early February, which reduced tariffs from 50% to 18%, marks a clear shift away from that stance. The announcement lifted investor sentiment, with MSCI India rising 4%¹ on the day, its strongest single‑day gain in five years, while foreign institutional inflows rebounded to about $1.48 billion in February to date.

Weekly highlights

New Tariff Rate on India ^{(vs previous 50%)} 18%

FII into Indian Equity Market ^{(in Feb.)} $1.48B

MSCI India IT EPS Growth ^(CY25) 7%

Source: NSDL, Net foreign institutional equity flows, as of 17 February 2026, in USD; FactSet. MSCI India IT EPS growth (recurrent earnings), CY 2025, local currency.

India IT at an inflection point: Adapting to the age of AI

Progress on global trade negotiations supported broader sentiment in Indian equity markets in recent weeks. However, that positive backdrop was overwhelmed by the launch of advanced AI tools on Anthropic’s Claude platform, which triggered a sharp sell-off across global software and services stocks. The resulting risk-off move spilled into India, with the IT sector declining 8.3% in US dolar terms during the week ended February 13, 2026.

The sell-off came at a time when Indian IT was already under pressure. Over the past five years, the US IT sector, buoyed by the AI wave, has delivered cumulative returns of 119% in US dollar terms. By contrast, the MSCI India Information Technology Index has generated a cumulative return of just 0.7% over the same period, highlighting a prolonged and material divergence in performance.

Sector composition goes a long way in explaining this gap. US technology exposure is heavily skewed toward AI platforms and infrastructure-semiconductors, hyperscalers, and software companies with direct and scalable monetization pathways from AI adoption. Indian technology exposure, by contrast, remains dominated by IT services and outsourcing models.

In this context, AI is increasingly perceived as a deflationary force rather than a near-term revenue catalyst, reducing billable hours, compressing pricing, and accelerating productivity gains. As generative AI reshapes delivery economics, the industry is transitioning from traditional headcount-based, time-and-materials-based models toward outcome-based, AI-enabled frameworks, where clients pay for measurable business outcomes rather than incremental manpower.

These structural headwinds are clearly reflected in operating fundamentals. Following the post-pandemic surge, earnings growth has steadily decelerated. Operating margins fell to 15.73% as of December 2025, below the long term average of 19.48%, reflecting the combined impact of elevated wage costs from the 2021–2022 hiring cycle, and slowing top-line growth amid tighter client IT budgets. Revenue growth for CY25 stood at just 7%, significantly below the long-term average of 17%. Valuations have adjusted accordingly: the Indian IT sector now trades at approximately 19.1x forward earnings, representing a 20% discount to its long term average².

Looking ahead, AI adoption is likely to remain a near-term earnings and margin headwind, driven by pricing pressure and cautious client spending. That said, AI also creates opportunities for higher-value work across data engineering, model deployment, platform integration, and regulatory compliance.

India IT services firms play a central role in the global technology ecosystem as system integrators, leveraging deep client relationships and decades of experience modernizing complex legacy systems. While the current AI transition may prove more disruptive than prior technology shifts, the sector has demonstrated agility through its successful navigation of cloud adoption and digital transformation. Alongside sustained investment in AI-enabled delivery models and workforce upskilling, this supports a case for cautious optimism. Over time, continued capital expenditure by hyperscalers and large technology platforms should begin to flow through to downstream services demand, laying the groundwork for a more durable recovery.

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Footnotes

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