The sector fell nearly 41% from its peak, but the story is far more nuanced than the headlines suggest.

If you've been watching your IT portfolio bleed over the past year and a half, you're not alone. The Nifty IT index crashed from a peak of 46,089 in December 2024 to a low of 27,078 in May 2026, a brutal fall that left many investors wondering: is it time to buy, hold, or just walk away?

The answer, as always, is: it depends. Let's break down what's actually going on.

Why Has IT Been Hammered So Hard?

There isn't just one reason. There are three, and they've been hitting the sector simultaneously.

1. FIIs Are Getting Better Returns Elsewhere: Foreign investors have been pulling money out of Indian IT, and honestly, the math tells you why. The Indian Rupee has depreciated nearly 5% over the last three years, and the profit CAGR of the top 5 large-cap IT companies has been around 5.5% in the same period. Net returns to a foreign investor? Barely 0.5%, while taking on equity risk, currency risk, and emerging market risk. Compare that to US Treasury yields at 4–4.5%, and it's a no-brainer where global money is going.

2. Global Capital Is Chasing AI, and Indian IT Isn't the Play: Markets connected to the AI semiconductor and infrastructure supply chain (Taiwan, South Korea, the Netherlands, the US) have massively outperformed. Indian IT companies, which run on a traditional labor-arbitrage model (Revenue = Billable Hours × Rate), simply don't have meaningful exposure to GPUs, data centers, memory chips, or cloud platforms. India's 12-month return? -11.26%. South Korea's? 203.48%.

3. The Middle East Conflict: This one's underreported. Multiple management teams, TCS specifically, flagged that the Gulf conflict has caused deal deferrals and client hesitancy in the Middle East region, adding an operational headwind that doesn't get enough airtime.

The Big Question: How Disruptive Is AI, Really?

This is where it gets genuinely interesting. HCL Tech's C. Vijayakumar offered the most useful framework: the IT services market can be split into three buckets.

• 40% "AI-disrupted" (app development, traditional infra, customer support): facing 3–5% annual shrinkage for years, eventually stabilizing at 25% of enterprise spend
• 55% "AI-amplified" (data, cloud, cybersecurity): growing at 10%+
• 5% "AI-native" (agentic AI, custom silicon): growing at 30%, potentially becoming 20%+ of the market in five years

AI is both a headwind and a tailwind. New AI projects command premium pricing, but older work is getting compressed. The defining question for the sector: can new AI business grow faster than old business shrinks? Nobody has a clear timeline on the inflection point yet.

Are Midcaps Actually in a Better Spot?

Surprisingly, yes. While large caps are dragged down by massive legacy workforces and commoditised contracts, midcaps like Persistent (+16.2% YoY), Coforge (+21.2% YoY), and Mphasis (+7.1% YoY) are growing in dollar terms, while TCS is at -2.4% and Wipro at -0.2%.

Midcaps have a leaner cost base, a revenue mix tilted toward AI transformation work, and they're tapping newer growth channels like PE-backed companies hungry for tech-led cost savings.

What Should You Watch Going Forward?

Keep an eye on quarterly AI revenue disclosures, management commentary on deal pipelines, and whether the GCC (Global Capability Centre) threat is eating into midcap BFSI revenue. TCS's ambitious HyperVault data center bet (1GW capacity, 100MW committed to OpenAI) is also one to track closely.

Conclusion

The Indian IT sector is at a genuine inflection point, not a collapse, but a transformation. The companies that pivot smartly toward AI-amplified and AI-native work will emerge stronger. The ones that don't will face a slow grind.

For a much deeper dive into the financials, management commentary, and a stock-by-stock breakdown of large caps vs midcaps, watch the full video 👇▶️

Watch: Is the Worst Over for IT? | CA Rachana Ranade

Disclaimer: This blog is for educational purposes only and does not constitute investment advice. Please consult a SEBI-registered financial advisor before making any investment decisions.