Indian IT Sector Faces Another Slow Quarter as Global Uncertainty Hits Growth Outlook

India's information technology (IT) sector is likely to report another subdued quarter for July-September, traditionally a period of stronger business activity, as global economic uncertainty, cautious client spending and weak deal momentum continue to weigh on growth, according to analysts.

A research note by HDFC Securities points to persistent pricing pressure across the sector, with artificial intelligence (AI)-driven productivity gains increasingly being passed on to clients during contract renewals and new deal negotiations.

The brokerage estimates that revenue growth among tier-1 IT companies could range from a 0.4 per cent decline to a 2 per cent increase quarter-on-quarter in constant currency terms in Q2 FY27. Mid-tier companies are projected to record growth of 0.6 per cent to 6.3 per cent, partly supported by acquisitions.

With first-half performance tracking below expectations, the industry's prospects for the full financial year will increasingly depend on a recovery in the second half. However, the seasonally weaker third quarter, typically affected by client furloughs, could limit the pace of improvement and weigh on full-year growth estimates.

Several factors are expected to cushion the impact of subdued demand. Rupee depreciation, operational efficiency measures and higher employee utilisation rates could help offset the effects of salary hikes. However, concerns that AI-driven automation will reduce the volume of traditional IT services continue to weigh on sector valuations.

Indian IT companies maintain that deploying generative AI directly across complex enterprise systems remains challenging, particularly in established business environments with extensive legacy infrastructure and stringent regulatory requirements. This is keeping system integration (SI) vendors relevant as businesses seek to incorporate AI into their existing operations.

The industry is also attempting to offset an estimated 6-7 per cent deflationary impact through fresh AI-focused contracts. However, converting these opportunities into substantial revenue growth remains a slow process.

According to the HDFC Securities note, a meaningful recovery will depend increasingly on execution, as new contracts are shifting towards outcome-based pricing, AI-assisted delivery models and discounted renewals. These changes are reshaping traditional revenue structures and putting pressure on service providers to demonstrate measurable business results.

Despite the challenging operating environment, valuations across the IT sector remain close to historical lows, while free cash flow yields continue to appear attractive, the brokerage noted.

With second-quarter earnings expected to be weaker than those of the first quarter, investor sentiment towards IT stocks is likely to remain fragile in the near term.

Broader Indian equity markets are also facing mounting external pressures. Analysts point to a record global bond market sell-off, renewed strength in crude oil prices and the heaviest foreign investor selling in six months as key factors weighing on market sentiment.

The combination of uncertain global demand, changing technology economics and pressure on equity markets is likely to keep investors cautious as India's major IT companies prepare to announce their September-quarter results.