India’s IT sector is expected to experience a 14-16% deflation driven by artificial intelligence (AI), according to a report. However, the robust performance of US corporations in Q4 2025 and increased investments could help mitigate much of the impact. Some IT companies may still achieve mid-single digit ‘net’ growth overall.
The report highlights that top US corporate results, particularly those linked to Indian IT, have remained strong in Q4 2025. Additionally, there has been a positive revision in the forward earnings expectations of the S&P 500.
The research suggests that the improving business environment and AI-driven productivity enhancements are likely to spur additional investments in enterprise software migration, modernization of legacy technologies, and AI integration. It also anticipates a shift in guidance from Indian IT firms towards more realistic or even aggressive projections.
The report points out a lack of concrete real-world examples supporting the notion of AI replacing traditional software. This uncertainty surrounding AI, along with the absence of substantial data countering the AI narrative, has led to a devaluation of stock prices in the sector. The upcoming FY27 guidance from major IT companies is seen as a crucial factor for the industry.
Despite challenges to profitability in the short term, IT firms have observed an uptick in demand, particularly in the December quarter. The transition of AI from experimental phases to operational use has influenced deal pipelines and recruitment efforts positively. Several major IT players have adjusted their revenue forecasts upwards, reflecting a growing optimism around AI-driven growth.
