India’s $315 billion IT sector is facing one of its toughest periods in years. The Nifty IT index has fallen about 25 percent from its January 2026 level, making it the worst-performing sector so far this year.
Several factors have come together at the same time. Concerns over artificial intelligence, slower spending by US clients, visa-related issues and higher US bond yields have all weighed on sentiment.
Despite the pressure, domestic investors have provided support, preventing a deeper correction.
Four Factors Behind the Weakness
No single issue explains the downturn. Instead, the sector has been hit by multiple headwinds.
AI disruption concerns
Global investors are increasingly worried that generative AI could reshape the traditional outsourcing model that helped Indian IT companies build scale.
Industry estimates suggest traditional IT services revenues could face annual deflation of around 2-3 percent over the next few years.
Announcements by companies such as Anthropic, OpenAI and Palantir have heightened concerns that tasks once billed through large workforces could increasingly be automated.
Softer demand from the US
The US contributes more than half of revenues for most large Indian IT companies.
However, companies have been seeing:
- Slower deal pipelines.
- Delays in technology spending decisions.
- Uncertainty related to tariffs and immigration policies.
- Geopolitical tensions affecting client sentiment.
India’s five largest IT companies are expected to report revenue growth of around 3-4 percent in the near term, well below the double-digit growth rates seen in previous years.
The industry is also dealing with proposed visa fees of up to ₹95 lakh, or about $100,000, per H-1B application.
For companies that rely on deploying engineers to client locations in the US, higher costs could affect margins and operational flexibility.
Higher US yields and currency pressure
US bond yields above 4 percent have made developed market assets more attractive.
At the same time, weakness in the rupee has reduced returns for foreign investors, adding to the pressure on emerging markets.
FII Selling Has Intensified
Foreign investors have been reducing their exposure to Indian equities for more than two years.
Key numbers
- Cumulative FII outflows exceeded $46 billion between January 2024 and December 2025.
- FPI ownership in NSE-listed companies fell to 16.9 percent, the lowest level in more than 15 years.
- FIIs sold nearly ₹1.98 lakh crore between January 1 and April 30, 2026.
- Total outflows in 2025 stood at around ₹2.4 lakh crore.
IT stocks have been among the hardest hit.
In February 2026 alone, foreign portfolio investors sold ₹16,949 crore worth of IT shares.
During the same month, they were net buyers of ₹22,615 crore in the broader equity market.
That divergence suggests the selling has been concentrated in IT rather than being part of a broad-based exit from Indian equities.
Domestic Investors Have Provided Support
A notable shift has emerged in the ownership pattern of Indian equities.
As of March 2026:
- DII ownership rose to a record 18.9 percent of market capitalisation.
- FII ownership declined to 14.7 percent, a 14-year low.
For the first time, domestic institutional investors held a larger share of India Inc than foreign investors.
DIIs sharply increased purchases in March 2026 and absorbed much of the selling pressure from overseas funds.
Systematic investment plan (SIP) inflows also remained resilient. The month that saw the weakest market performance recorded the highest SIP contribution during the period.
Valuations Have Come Down
The correction has pushed the Nifty IT price-to-earnings ratio below its one-year and two-year historical averages.
Some analysts view current valuations as attractive compared with past levels.
Still, any recovery is likely to depend on earnings growth and improvement in global demand.
Companies Are Adjusting to AI
Large IT companies are trying to adapt to changing technology trends.
Companies such as TCS, Infosys and Wipro are investing in AI capabilities and retraining employees as they seek to move beyond the traditional labour-arbitrage model.
Analysts expect improvement to be gradual rather than immediate.
A softer dollar and a more accommodative stance from the US Federal Reserve could support flows into emerging markets, including India.
India’s long-term growth drivers, including digitisation, demographics and capital expenditure, continue to remain in place. However, the IT sector is undergoing a period of adjustment as companies respond to technological and macroeconomic changes.
TL;DR:
Indian IT stocks have come under pressure due to AI concerns, slower US spending, visa issues and heavy FII selling. Domestic investors have helped absorb the outflows, while lower valuations have brought the sector closer to historical averages.
AI Summary
- Nifty IT has fallen about 25% from January 2026 levels.
- AI concerns and slower US demand have weighed on sentiment.
- FIIs sold nearly ₹1.98 lakh crore between January and April 2026.
- Domestic investors have offset much of the selling pressure.
- Large IT companies are investing in AI and retraining employees.
