Synopsis : Indian IT stocks have had a difficult 2026, with the Nifty IT Index falling more than 19% so far despite a rebound of over 5% in the past month. While market experts remain cautious on the broader sector and especially on large-cap IT stocks such as TCS and Infosys, several see better opportunities in selective midcap companies that can adapt faster to the AI-led disruption.
2026 has been a difficult year for Indian technology stocks.
The Nifty IT Index is down more than 19% so far this year, reflecting concerns over weak discretionary technology spending, global macro uncertainty and the growing disruption caused by artificial intelligence.
There has been some relief recently. The index has gained more than 5% over the past month.
But does that mean the worst is over for India's biggest IT companies?
Market experts are not entirely convinced.
While some believe the valuation correction may have reduced the downside for the sector, concerns around demand remain. Large-cap names such as TCS, Infosys and HCLTech have fallen by as much as 15% over the past six months.
The emerging view among several market veterans is clear: the Indian IT sector is unlikely to disappear because of AI, but the winners of the next phase may look different from those of the previous one.
And for investors, that is creating a growing preference for selective midcap IT companies over a broad-based bet on large-cap technology stocks.
Indian IT has survived disruption before
Devina Mehra, Founder, Chairperson and Managing Director of First Global, believes the current fears surrounding artificial intelligence are not the first existential challenge faced by India's technology sector.
As she pointed out, the industry's “obituary” has been written many times.
The sector has moved through Y2K, digitisation, cloud computing, software-as-a-service and several other technological transitions. Each time, concerns emerged that the existing business model would become obsolete.
Yet Indian IT companies adapted.
Mehra said she was never among those who believed the sector was going to disappear. Instead, she believes Indian technology companies have repeatedly demonstrated an ability to adjust their business models as the industry evolves.
That does not mean the current disruption will be painless.
AI is fundamentally different because it directly targets productivity, which lies at the heart of the traditional IT services business model. If companies can deliver the same amount of work with fewer employees, clients are likely to demand a share of those productivity gains.
That creates near-term pressure on revenue growth.
But the same technology could eventually create entirely new areas of demand.
Has the worst of the IT sell-off passed?
The recent rebound has encouraged investors to ask whether the worst may be over.
Mehra believes it is difficult to call an exact bottom, but she sees the downside as becoming more limited.
However, she also cautioned against assuming that factors such as rupee depreciation will provide a lasting boost to IT companies. Since IT services contracts are transparent and clients are aware of currency benefits, companies may eventually have to pass some of those gains back to customers.
Kotak Mahindra AMC's Shibani Kurian remains more cautious about the near term.
She expects continued volatility in IT stocks, driven by sharp movements across global technology markets and uncertainty around discretionary technology spending.
The result is likely to be a battle between two competing narratives.
On one side are AI infrastructure companies, including chip and memory manufacturers, which have benefited directly from the AI spending boom.
On the other are software and IT services companies, where investors remain concerned that AI could lead to pricing pressure and revenue compression.
However, Kurian believes current valuations may already be pricing in a significant amount of business continuity risk.
Her view is that AI could eventually become a business amplifier for the sector, even if it creates deflationary pressure in the short term.
AI is the biggest risk — and potentially the biggest opportunity
The central question for Indian IT investors is whether artificial intelligence will destroy the traditional IT services model or simply transform it.
The answer, according to many market experts, is somewhere in between.
CLSA believes AI could lead to revenue compression in the near term but also create significant growth opportunities over the longer term.
The immediate problem is productivity.
As AI enables companies to automate coding, testing and other technology services, clients could demand lower prices or productivity-linked savings. This means IT companies may initially struggle to generate enough new AI-related revenue to offset the pressure on existing services.
Shibani Kurian believes enterprise adoption of AI is still at an early stage.
At present, the additional revenue generated from AI services is not yet large enough to fully offset the deflationary impact of productivity improvements.
But over the medium to long term, that could change.
As AI adoption expands, companies could win larger transformation projects, develop higher-value consulting capabilities and generate more revenue from AI-led services.
The companies that can offer AI solutions to clients while also using AI internally to improve their own productivity could emerge as the next leaders of the sector.
Why Indian IT stocks are reacting to global AI trends
Gautam Duggad, Head of Research – Institutional Equities at Motilal Oswal Financial Services, believes Indian IT stocks will continue to react strongly to global technology trends.
The sector is increasingly being influenced by the broader global AI trade.
When investors become optimistic about AI infrastructure, money often flows towards chipmakers and memory companies.
But when concerns emerge around whether AI spending is sustainable or whether returns on those investments will justify the massive capital expenditure, software and IT services stocks can become relatively attractive.
This means Indian IT stocks may remain volatile even when their own company fundamentals have not changed dramatically.
For investors, this creates an unusual situation.
A company can report stable earnings and continue winning deals, but its share price may still move sharply based on what is happening in global AI stocks.
That makes stock selection increasingly important.
The banking industry offers an interesting comparison
Several experts have compared the current AI disruption with the transformation of India's banking sector.
When banks began computerising operations in the 1980s, there were widespread concerns that automation would destroy banking jobs.
Handwritten ledgers were replaced by computers. Branches became connected through core banking systems. Internet banking emerged, followed by mobile banking and digital payments.
Many tasks were automated.
Yet the banking industry continued to expand.
Rajeev Thakkar, CIO – Equity and Director at PPFAS, has pointed out that banks today employ significantly more people than they did during the 1980s and 1990s despite massive technological automation.
The lesson is not that AI will have no impact on employment.
It will.
Some roles and companies will face serious disruption, while workers will need to retrain and adapt.
But at an aggregate level, technological disruption can also create entirely new industries and jobs.
The bigger concern for India's IT sector may therefore not be its survival.
It may be whether the sector can move fast enough up the value chain.
The real challenge: Moving beyond the old IT services model
This is where Devina Mehra sees a more fundamental problem.
For decades, India's IT industry has benefited from access to skilled talent, global clients and strong cash generation.
But she believes many companies continued to rely heavily on the traditional client-services model instead of developing a stronger research and development culture.
AI could now force that change.
The old model was built around scaling through people.
The next model may need to focus more on intellectual property, specialised AI solutions, consulting, platforms and higher-value technology services.
Companies that simply use AI to reduce employee costs may survive.
But companies that successfully use AI to create new products, services and revenue streams could potentially emerge much stronger.
That is one reason why several investors are becoming increasingly selective.
Why midcap IT stocks are getting more attention
The preference for midcap IT companies is becoming one of the clearest themes among market experts.
Devina Mehra said First Global has exposure to both large-cap and midcap IT companies. However, midcaps offer a wider variety of strategies and therefore require a more company-specific approach.
Large-cap IT companies remain closely tied to the broader demand environment.
Even if they develop new AI capabilities, these businesses may still be too large for new initiatives to make an immediate and meaningful difference to overall revenue.
Midcap companies can be more agile.
A successful AI-focused strategy, specialised vertical or major deal win can potentially have a much larger impact on their growth trajectory.
Kotak's Shibani Kurian has also expressed a preference for midcap IT companies over large caps because of the growth differential between the two segments.
Her broader sector stance remains Neutral to marginally Underweight, but she believes companies that are agile in offering AI-led solutions while achieving productivity improvements could emerge as leaders over the medium to long term.
What about TCS and Infosys?
The call on large-cap IT is more nuanced.
Most experts are not declaring companies such as TCS and Infosys uninvestable.
Instead, they are cautious about the sector as a whole because large companies remain heavily exposed to the broader global technology spending cycle.
Growth in newer AI businesses is also still relatively small compared with their overall revenue base.
This makes it harder for large caps to deliver a dramatic acceleration in growth in the near term.
However, Motilal Oswal continues to have Infosys in its model portfolio despite maintaining an overall Underweight position on the IT sector.
The brokerage also has Coforge in its model portfolio, reflecting the growing preference for selective stock picking rather than a broad sector call.
This is perhaps the most important message for investors in 2026.
The IT sector is no longer a simple trade where buying the largest companies automatically provides the best exposure to India's technology growth story.
The divergence between companies could become much wider.
How market experts are positioning themselves
Devina Mehra of First Global remains selectively optimistic and prefers a mix of large-cap and company-specific midcap IT stocks.
Shibani Kurian of Kotak Mahindra AMC remains Neutral to marginally Underweight on the overall sector but prefers midcap companies because of their potentially stronger growth prospects and greater agility.
Gautam Duggad and Motilal Oswal remain Underweight on the broader IT sector. However, Coforge and Infosys remain part of the brokerage's model portfolio.
CLSA remains cautious about the near-term impact of AI but sees the technology creating potentially significant growth opportunities over the longer term.
The common theme is that experts are becoming increasingly selective.
Rather than betting on the entire IT sector, investors may need to identify companies that can successfully navigate the transition.
What should investors watch next?
The next phase for Indian IT companies will depend on several factors.
The first is discretionary technology spending. A recovery in global corporate spending could provide immediate support to revenue growth.
The second is AI monetisation. Investors will increasingly look beyond announcements and ask how much revenue companies are actually generating from AI-related services.
The third is margins.
AI may initially create pricing pressure, but companies that successfully automate their own operations could eventually protect or even expand profitability.
Finally, investors will watch which companies can move up the value chain.
The biggest winners may not necessarily be the companies with the largest employee base. They could instead be companies with specialised capabilities, strong client relationships and the ability to convert AI disruption into new revenue opportunities.
Conclusion
The Indian IT sector has faced major disruptions before and survived each one.
AI is creating another difficult transition, and the near-term outlook remains uncertain. Demand weakness, productivity-linked pricing pressure and global technology volatility are likely to keep the sector under pressure.
But most market experts do not see AI as the end of Indian IT.
Instead, they see it as a major restructuring of the industry.
The large-cap IT story remains cautious for now, with companies such as TCS, Infosys and HCLTech still heavily influenced by the broader global demand environment.
The more interesting opportunities, according to several market experts, may lie in selective midcap IT companies that can adapt faster, offer specialised AI-led solutions and generate stronger growth.
For investors, the strategy in 2026 appears to be shifting away from simply buying the IT sector.
It is becoming a stock-picker's market.
The key will be identifying which companies can turn AI from a short-term threat into a long-term competitive advantage.
Disclaimer: This article is based on market commentary, research reports and views expressed by investment professionals and is intended for informational purposes only. The views and opinions mentioned belong to the respective experts and institutions and should not be construed as investment advice or a recommendation to buy or sell any security. Investors should conduct their own research and consult a SEBI-registered financial advisor before making investment decisions.
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