The Indian Information Technology (IT) sector, once seen as a defensive play for investors, is grappling with a downward re-rating. Analysts point to a mix of factors such as slowing discretionary technology spending, US visa uncertainties, and the disruptive impact of artificial intelligence (AI) on traditional jobs as reasons why the sector has struggled to outperform the indices.
According to Emkay Research’s report, the Nifty IT Index has underperformed the broader markets by 3.9 per cent in the last three months, and 15.5 per cent in the last six months. While a modest recovery was visible in the past month due to a weaker rupee, and expectations of interest rate cuts by the US Federal Reserve, the sector’s medium-term outlook remains cautious.
Hiring slump signals
weak demand
A leading employment indicator, Naukri’s JobSpeak Index, highlights the sector’s muted momentum. Overall, hiring grew 3.4 per cent year-on-year in August 2025, but fell 13.3 per cent month-on-month. More worryingly, hiring in the IT-software and software services de-grew 6 per cent YoY, and dropped a sharp 15.6 per cent MoM, marking the sixth monthly decline in eight months.
“IT players are expected to run operations tighter and maintain higher utilisation amid the soft demand environment, with hiring recovering gradually driven by a rebound in tech spending, easing macro risks, and renewed discretionary tech spending in CY25,” the Emkay report explained.
AI and machine learning (ML) remain the bright spot in the sector, growing 54 per cent YoY. But these positions are fewer in number, although they are highly-skilled and high-paying, compared to the large base of traditional software jobs. The Emkay report observed that AI-centric positions are increasingly complementing or replacing conventional IT roles, creating a mismatch in the job market.
US policy adds to anxiety
Indian IT stocks face structural headwinds from tightening US H-1B visa norms, as well as curbs on migration. The US tariff regime has created further pressures on Indian exporters of goods and services. “Elevated macro and geopolitical uncertainty dampen the outlook for IT spending, and could delay a broad-based recovery in client spending,” the Emkay analysts wrote.
AI: A double-edged sword
While AI is a growth engine, it is contributing to job redundancies and skill mismatches. The Emkay report noted that companies are focusing on specialised AI expertise, while trimming traditional roles. This shift is evident in the hiring patterns: fresher recruitment remains strong in emerging hubs like Jaipur (+26 per cent) and Kochi (+16 per cent), while experienced hiring is led by sectors like oil and gas, and healthcare sectors, rather than the IT one.
Mid-cap IT firms, with their agile execution and focused bets on high-growth areas like AI, are expected to outperform the larger players. “We believe mid-cap companies are likely to continue outperforming Tier-1 players, driven by stronger execution capabilities, strategic deal sourcing, and focused investments in high-growth areas,” the Emkay’s analysts observed.
Valuation reset
The underperformance of the IT sector is stark when compared with the broader indices. Over the past year, the Nifty IT Index fell by 16 per cent, while the Nifty 50 was down three per cent. According to Sonam Srivastava, Founder at Wright Research, “In technology, IT services companies continue to face muted earnings growth, but attractive dividend yields and low investor expectations provide valuation support. Any second-half acceleration driven by Gen-AI monetisation or easing global interest rates could lead to a sector re-rating. Internet platforms, meanwhile, remain in high-growth territory, benefiting from the shift from scale to profitability. Financials are adjusting to moderating growth and normalising credit costs.”
According to the Motilal Oswal Financial Services research report on technology: “IT services companies maintain a cautiously optimistic outlook while recognising that ongoing macroeconomic headwinds continue to pressure overall demand. Infosys maintained a cautiously optimistic stance (upgrading the lower end of guidance), with the upper end of its three per cent YoY organic CC guidance hinging on a gradually improving environment, while HCLT remained the most constructive, guiding for 3-5 per cent YoY CC growth (also, upgrading the lower end of guidance).”