- Indian IT index down 32% from its December 2025 peak – the steepest drawdown since 2008.
- AI tools from Anthropic and others are raising existential questions about the outsourcing model.
- US labour‑market strength could keep Fed rates high, adding pressure to rate‑sensitive tech names.
- Analysts see only limited upside for large‑cap IT services unless AI capability gaps are closed.
- Selective exposure to AI‑savvy firms may offer the best risk‑adjusted returns.
You’re watching your IT holdings bleed, and most investors missed the warning signs.
Why the IT Index’s 32% Drop Mirrors the 2008 Lehman Shock
The Nifty IT index slid 1.1% on February 16, marking the fourth consecutive losing day and a cumulative 9.5% dip over that stretch. From its all‑time high of 41,530.3 in December 2025, the index is now 32% lower – a trajectory last seen during the Lehman‑driven crisis of 2008. That historical parallel matters because both periods featured rapid shifts in market perception: then it was credit risk, now it is technological risk.
Over the past two years, the sector has already shed about 13% in 2025 and another 15% in early 2026. The correction is not a random market wobble; it reflects a structural re‑pricing of earnings expectations as investors reassess the durability of the classic “low‑cost offshore delivery” model.
How AI Is Reshaping the Business Model of Infosys, TCS, and Wipro
Anthropic’s rollout of a legal‑focused AI module for its Claude chatbot sparked fresh anxiety. The tool can draft contracts, analyse clauses, and even suggest negotiation strategies – functions that traditionally required a team of consulting‑grade lawyers and, by extension, the backing of a tech services firm.
For Indian IT giants whose revenue streams rely heavily on labour‑intensive coding, testing, and maintenance, AI threatens to compress margins on two fronts:
- Productivity gains: AI can automate routine coding tasks, reducing the man‑hours needed per project.
- Entry‑barrier erosion: Cloud‑based AI platforms enable midsize enterprises to build custom applications in‑house, bypassing the need for external vendors.
Companies that have already invested in AI‑enhanced service lines – such as Infosys’ “AI@Scale” and TCS’s “Ignio” platform – are positioned to retain a portion of the workflow. However, analysts note that only 12‑15% of sector revenue is directly exposed to AI‑driven productivity gains today, suggesting a lag between hype and material impact.
Macro Ripple Effects: US Jobs Data, Fed Policy and the Indian Tech Sector
US job growth surprised to the upside in January, nudging the unemployment rate to 4.3%. A tighter labour market fuels expectations that the Federal Reserve will keep policy rates steady or even hike them further to combat inflation. Higher rates typically depress technology valuations because future cash flows are discounted at a steeper rate.
Indian IT stocks, although denominated in rupees, are heavily tied to dollar‑denominated contracts. A stronger dollar combined with a higher cost of capital abroad squeezes profit margins and makes offshore services less attractive compared to on‑shore automation solutions.
Historical Parallel: Outsourcing Waves from the 1990s to Today
In the 1990s, Indian IT services flourished because enterprises grappled with massive volumes of self‑built, non‑standardised code – a scenario that demanded external expertise for security, scalability, and maintenance. Back then, self‑built software accounted for 35‑40% of total software spend.
Fast forward to 2024, that figure has fallen to roughly 14%, reflecting a shift toward packaged solutions and SaaS models. The current AI wave mirrors that earlier transition: just as packaged software reduced the need for custom code, generative AI reduces the need for custom development. The pattern suggests that sectors built on “complexity‑driven demand” eventually give way to “productivity‑driven supply.”
Investor Playbook: Bull vs. Bear Cases for Indian IT Stocks
Bull Case – Companies that can embed AI deep into their service offerings, diversify into high‑margin digital products, and maintain strong balance sheets will outpace peers. Look for firms with:
- Clear AI‑centric revenue pipelines (e.g., AI‑enabled automation services).
- Low debt ratios and healthy free‑cash‑flow conversion.
- Strategic partnerships with cloud giants (Microsoft, Google, AWS) that can accelerate AI adoption.
Bear Case – Firms that remain overly dependent on legacy staffing‑intensive contracts face margin compression and revenue churn as clients adopt in‑house AI tools. Red flags include:
- High employee‑to‑revenue ratios relative to peers.
- Limited AI productisation and low R&D spend on emerging technologies.
- Exposure to long‑duration offshore contracts that may be renegotiated or terminated.
Given the current valuation gap – the sector trades below long‑term averages with a projected 10‑year free‑cash‑flow CAGR of ~6.5% – a selective re‑allocation toward AI‑ready firms could improve portfolio resilience. Conversely, holding a broad basket of large‑cap IT services without a clear AI upgrade roadmap may expose investors to further downside.
In short, the AI disruption narrative is not a passing fad; it is reshaping the very economics of Indian IT services. Your next move should hinge on whether you believe a firm can pivot fast enough to capture the emerging AI‑driven upside, or whether it will be left behind as clients internalise more of their software needs.