AI's Impact on Indian IT Sector: Growth Slowdown and Market Shifts

The Indian IT industry is facing a period of transformation as artificial intelligence (AI) reshapes business models and revenue expectations. Kumar Rakesh, India analyst for IT and automotive sectors at BNP Paribas, predicts a slowdown in revenue growth for most IT companies in fiscal year 2027 (FY27) compared to FY26. This shift comes amid cautious technology budgets and evolving client priorities.

AI’s rapid integration into IT services is changing how companies generate income and how investors evaluate them. According to Rakesh, while macroeconomic challenges and uncertainties around generative AI persist, some mid-cap companies appear to be better equipped to adapt than their larger counterparts. These mid-sized firms are gaining recognition as drivers of technological innovation and cost disruption, allowing them to capture more market share even as traditional demand softens.

Large-cap Indian IT firms currently face pressure due to their exposure to legacy services that AI could potentially disrupt through automation and deflationary pricing. These companies also confront muted revenue growth as they defend their established market positions. BNP Paribas forecasts large-cap IT service firms to register around 2% year-on-year constant-currency revenue growth in FY27. However, once inorganic growth factors like acquisitions are excluded, median growth is expected to fall below 2%, signaling a general deceleration.

The second quarter earnings for FY27 are approaching, and market expectations remain subdued. Discretionary technology spending is weak, reflecting client caution about the returns from AI investments. This environment creates a double challenge for Indian IT providers: managing slower traditional demand alongside tighter technology budgets. The transition toward AI-driven service offerings is progressing unevenly, with larger firms taking longer to shift due to their broad service portfolios and significant legacy business.

In contrast, mid-cap players such as Persistent Systems are emerging as prominent beneficiaries of the AI adoption wave. These companies often serve as catalysts for cost-saving and technology transformation projects, positioning them well to seize new opportunities as enterprises begin to integrate AI capabilities more fully.

Advanced AI tools like ChatGPT and Claude Code have already started to reduce the need for entry-level coding and bug fixing labor, slowing fresh hiring in those segments. This raises questions about potential layoffs and the future relevance of traditional billing models based on headcount. BNP Paribas notes that IT firms are gradually shifting toward outcome-based revenue models, with revenue growth increasingly decoupled from headcount expansion since FY22. However, the transition remains gradual because large-scale legacy systems complicate rapid AI integration.

Global IT leaders such as Accenture and EPAM have recently trimmed their forward guidance due to macroeconomic pressures and changing pricing dynamics. This raises concerns about potential further downward revisions in Indian IT stocks. Still, BNP Paribas believes that much of this risk is already reflected in current share prices. The Nifty IT index has declined 27% in 2026 so far, underperforming the broader Nifty 50, as investors price in structural challenges including AI-driven revenue deflation and cyclical headwinds.

BNP Paribas estimates that AI-related deflation could subtract 3 to 4 percentage points from annual growth, while cyclical factors such as geopolitical tensions may reduce growth by an additional 2 to 3 percentage points. Current valuations appear to incorporate these risks, suggesting that the sector could trade in a range between 26,000 and 31,000 on the Nifty IT index. Key factors influencing volatility will include developments in global macro conditions, investor sentiment, and the evolving narrative about AI’s winners and losers within the Indian IT space.

Investors are moving beyond a simplistic binary view of companies as either benefiting or losing from AI. Instead, a more nuanced approach to stock selection is emerging, reflecting the diverse impact of AI across different service lines and company sizes. The era when broad market appreciation lifted all IT stocks is giving way to a phase that demands detailed differentiation and careful analysis.

Harsha Jethmalani, Deputy Editor at Mint and an experienced business journalist, authored the original analysis. With over a decade covering markets and corporate India, she focuses on sectors including IT, real estate, and cement. Her perspective highlights the complex interplay of technological innovation, market dynamics, and investor expectations shaping India’s IT industry today.