Why India's IT Index Is Crashing: AI Threats and a 23‑Year Low Await

Key Takeaways

• IT index down 4.7%, on track for its worst month since April 2003.
• Sector lost $68.5 bn in market cap this month, a 21% decline.
• AI hype is flipping from growth catalyst to disruption risk for Indian tech firms.
• Trade‑policy uncertainty from the U.S. adds a secondary headwind.
• Bear case: continued sell‑on‑rise pressure could push the index below 25,000.
• Bull case: selective exposure to AI‑ready peers may generate outsized upside.

Most investors ignored the fine print. That was a mistake.

Why the Nifty IT Index Is Sliding Into a 23‑Year Low

On Tuesday the Nifty 50 slipped 1.12% to 25,424.65 and the BSE Sensex fell 1.28% to 82,225.92. The IT sub‑index alone plunged 4.7%, hitting a 30‑month trough and erasing $68.5 billion in market value across its ten largest constituents. With a 21% drop in February, the sector is poised to record its worst monthly performance since the geopolitical shock of the U.S.–Iraq war in 2003, a period marked by muted earnings from Infosys and a SARS‑driven regional slowdown.

AI‑Driven Disruption: From Growth Engine to Existential Threat

Artificial intelligence has become a double‑edged sword for Indian tech. While firms such as TCS, Infosys, HCLTech and Wipro tout AI‑enabled services as the next revenue driver, the market is increasingly skeptical. Rapid advances in generative AI raise questions about the long‑term relevance of traditional offshore delivery models that have underpinned India’s $315 bn projected revenue for FY 2025‑26.

Investors are weighing two opposing narratives:

• Opportunity narrative: AI tools can boost billable hours, improve margins, and open premium‑pricing contracts with global enterprises.
• Disruption narrative: Automation could replace large swaths of coding and testing work, compressing the demand for low‑cost offshore labor and eroding the cost‑advantage that Indian firms have historically enjoyed.

When the technical chart shows the IT index slipping below key support levels—namely the 21‑day moving average and the 200‑day exponential trend line—traders interpret the move as a shift from “buy on dips” to “sell on rise.” Sachin Gupta of Choice Broking warns that the market is now rewarding short‑term pullbacks rather than rewarding the sector’s long‑term fundamentals.

How Global AI Winners Are Pulling Asian Markets Higher

Contrast India’s slump with the rally in AI‑linked equities across South Korea and Taiwan, where firms entrenched in AI hardware and software have posted record‑closing highs. Those markets benefited from a broader Asian rebound after a shaky start, underscoring that investors are rewarding clear AI exposure. Indian IT firms, however, appear caught in a limbo: they are AI‑enabled but still heavily reliant on legacy delivery models.

Trade‑Policy Uncertainty Adds a Second Layer of Risk

U.S. President Donald Trump’s recent warnings about imposing higher duties on countries that abandon newly negotiated trade deals have rattled risk sentiment. Although the Supreme Court recently struck down emergency tariffs, Trump’s rhetoric suggests a willingness to resort to alternative trade‑law mechanisms.

India has delayed planned trade talks with Washington, while China pushes for tariff roll‑backs and the EU freezes its approval process. The resulting geopolitical ambiguity has spilled over into Indian equity markets, dragging half of the 16 major sectors lower on the same day the IT index tumbled.

Sector‑Level Fundamentals: Revenue Outlook and Margin Pressure

NASSCOM projects that the Indian technology sector’s revenue will flatten around $315 bn in the next fiscal year. This modest growth reflects a cautious outlook amid AI‑induced restructuring, rising labor costs, and tighter client budgets in the United States and Europe.

Margin compression is already evident: TCS, Infosys, HCLTech and Wipro posted single‑digit declines (2.7%–6.1%) in their latest earnings, driven by currency headwinds and slower order inflows. The flattening top line combined with rising CapEx for AI research suggests that profit growth may lag behind the sector’s historical 12%‑15% margin expansion rates.

Competitor Landscape: Who Can Weather the AI Storm?

Within India, the traditional heavyweights are not the only players to watch. Smaller, niche firms that have built AI platforms—such as L&T Technology Services, Mphasis and Persistent Systems—show relative resilience. Their higher exposure to AI product development and lower reliance on large‑scale offshore delivery may position them better if the AI disruption accelerates.

On the global stage, rivals like Taiwan’s TSMC and South Korea’s Samsung are benefitting from AI‑related semiconductor demand, reinforcing the perception that AI winners are hardware‑centric. Indian firms lacking a comparable hardware footprint must double‑down on software innovation, cloud services, and data analytics to stay relevant.

Historical Parallel: The 2003 IT Crash and What It Taught Us

When the U.S.–Iraq war erupted in 2003, the Indian IT index fell sharply—down 18% over two months—as geopolitical risk spooked multinational clients. The sector rebounded only after a wave of cost‑optimization initiatives and a shift toward higher‑value services such as consulting and analytics. The key lesson: structural headwinds can be mitigated by moving up the value chain.

Today's AI shock mirrors that past scenario in that it forces Indian firms to reassess service portfolios. However, AI’s speed of adoption and the potential for wholesale automation make the transition more urgent.

Investor Playbook: Bull vs. Bear Cases

Bull Case: Selectively allocate to AI‑ready Indian firms with strong R&D pipelines, diversified client bases, and exposure to high‑margin cloud and analytics contracts. Consider a long‑term position in TCS and Infosys if they can demonstrate measurable AI‑driven margin expansion within 12‑18 months.

Bear Case: Expect continued pressure on the broader IT index if sell‑on‑rise dynamics persist and AI fears intensify. Short‑term traders may target the index for a rapid correction below the 25,000 level, especially if U.S. tariff rhetoric escalates.

Strategically, a balanced approach could involve a core holding in the sector’s market leaders for dividend yield and stability, paired with a satellite allocation to niche AI innovators that offer asymmetric upside.

Actionable Takeaways for Portfolio Managers

• Re‑evaluate exposure to legacy offshore delivery models; shift weight toward firms investing heavily in AI services.
• Monitor technical support levels (21‑day MA, 200‑day EMA) for entry/exit signals on the Nifty IT Index.
• Stay alert to U.S. trade‑policy developments; a sudden tariff escalation could trigger a broader market sell‑off.
• Use sector rotation tools to rotate into AI‑centric mid‑caps that are less correlated with the broader IT index.
• Consider hedging with equity‑linked notes or options if you anticipate a deeper correction.

In short, the Indian IT sector stands at a crossroads. AI can either be a catalyst for a new era of high‑margin services or a disruptor that erodes the cost advantage that has powered decades of growth. Your next move should reflect which side of that equation you believe will prevail.