After nearly four years of trailing the broader market, India's information technology sector is stepping into 2026 with a sense of cautious realism. Investors are closely watching to see if the promise of artificial intelligence can finally spark a sustainable recovery, ending a prolonged phase of sluggish growth that followed the pandemic-era boom.
From Pandemic Highs to a Four-Year Low
The Nifty IT index's journey has been a rollercoaster. In 2021, it soared by nearly 60%, fueled by a global rush for digital solutions, cloud migration, and robust deal flows. However, this spectacular run was short-lived. By 2022, the index crashed, falling over 26% as soaring global inflation, aggressive interest rate hikes, and recession fears forced clients worldwide to slash their discretionary technology budgets.
While there were rebounds of about 24% in 2023 and 22% in 2024, the recovery lacked strong conviction. The market was weighed down by macroeconomic uncertainty and the ambiguous early impact of AI. So far in 2025, the index has declined more than 10%, marking its second-worst annual performance in the last decade. For investors who entered after the 2021 peak, returns have been deeply disappointing, especially as sectors like defence, PSU banks, and auto raced to new highs.
The Dual Challenge: Cyclical Weakness and Structural Shifts
The sector's struggles stem from a combination of cyclical and structural factors. On the demand side, key markets like the US and Europe, which account for the bulk of Indian IT revenue, have remained cautious. Large enterprises have postponed major technology transformation projects due to concerns over inflation, interest rates, and geopolitical tensions.
Structurally, years of automation and cloud adoption have significantly boosted productivity at Indian IT firms. While this supports profit margins, it also means companies can now handle similar workloads with fewer people. The rise of AI has accelerated this trend, creating a 'deflationary' effect on revenue growth even as corporate profits elsewhere have held up.
AI Monetization: The Long Road to Revival
The central question for 2026 is whether Indian IT can successfully pivot to an AI-driven model. Analysts like Sumit Pokharna of Kotak Securities believe enterprise AI adoption will be a gradual process, unfolding over seven to eight years, where humans and AI agents collaborate. This complex integration phase, he argues, plays to the strengths of Indian IT firms experienced in managing large systems.
Early signs of AI monetization are emerging. Tata Consultancy Services has reported annualized AI-related revenue of approximately Rs 12,500 crore, calling AI a "civilizational change." HCL Tech has said its advanced AI revenue has crossed $100 million, accounting for nearly 3% of its revenue from 47 clients. Infosys has noted productivity gains of 40–50% in select workflows using its AI offerings.
Nomura points out that nearly all major IT services companies are ramping up AI investments in internal tools, client solutions, and partnerships. Clients are gradually moving beyond pilot projects to standalone AI implementations, which is seen as critical for meaningful revenue generation.
2026 Outlook: Stability Over Spectacular Growth
The outlook for the coming year appears more balanced. Recent quarterly results showed positive sequential growth for large-cap IT firms, a welcome surprise after several muted quarters. Order bookings have also remained strong, with median year-on-year growth around 26%.
Nomura forecasts revenue growth of about 4.5% for large IT firms in FY27, with mid-sized companies expected to grow faster. HSBC believes 4–6% growth is achievable if global confidence improves. Margins may also find support from AI-driven productivity gains, better utilization, and strict cost control, potentially offsetting wage hikes.
Most analysts, including Abhishek Jain of Arihant Capital Markets, agree that while a sharp, double-digit rebound like the pandemic years is unlikely, the worst may be over. The sector is adapting, and prospects are expected to improve as AI-led deals from the US and Europe start contributing more substantially to the top line. The path to revival in 2026 will be defined by steady execution and successful AI monetization, not overnight hype.
