Indian information technology firms are currently grappling with significant challenges stemming from the rise of artificial intelligence (AI). The influx of AI technology is not only jeopardizing future business prospects but also instigating a phenomenon termed ‘AI deflation.’ This refers to the diminishing order values as enhanced efficiencies reduce operational costs, which are subsequently passed on to clients.
This situation has adversely impacted their stock performance, as evidenced by the National Stock Exchange’s Nifty IT index, which has seen a decline of 23% in 2026. Notably, companies like Infosys and HCL Technologies have experienced declines ranging from 27% to 28% during this timeframe.
Foreign investors, who play a crucial role in the capital markets, have adopted a particularly pessimistic stance towards the Indian IT sector. They have decreased their holdings in leading companies by an average of over three percentage points during the fiscal year 2026. According to brokerage firm Motilal Oswal Financial Services, the allocation of Foreign Institutional Investors (FIIs) to the Indian technology sector fell to an all-time low of 7.3% by the end of March, down from 10.1% at the close of FY25.
Among the nine major IT service providers in India, Coforge experienced the steepest drop in FII holdings, plummeting by 9.6 percentage points in FY26. Infosys and Tech Mahindra also witnessed reductions exceeding 4 percentage points. Conversely, Wipro’s stake remained largely stable, showing no significant changes from FIIs.
Most of these firms, with the exceptions of Tech Mahindra, Wipro, and LTM (previously LTIMindtree), saw a decrease in FII stakes during the January-March quarter. This period coincided with heightened concerns about AI’s potential to disrupt the Indian IT services industry, particularly following the launch of legal plugins for the Claude chatbot by US-based Anthropic, which raised alarms among analysts about the sector’s future viability.
The repercussions on the Indian IT sector have been substantial enough to influence the broader Indian stock market, with the Nifty 50 index declining by 0.2% over the past year. As of mid-April 2026, FIIs have divested $21.6 billion in Indian equities, surpassing the $18.9 billion they sold throughout 2025. This includes $2.4 billion in net sales of Indian IT stocks, leading to a reduction in FII holdings in this sector from $59.8 billion at the end of 2025 to $41.4 billion.
Despite this trend, FIIs have continued to lessen their investments in IT companies, even as many analysts suggest that valuations in the sector, particularly for large-cap firms, have become more reasonable following the recent stock price corrections. In contrast, domestic institutional investors (DIIs), primarily made up of mutual funds and insurance companies, have increased their stakes in technology companies within the NSE 500 index by 4 percentage points in FY26, bringing their total to 22.3%.
This shift forms part of a larger trend, as noted by Motilal Oswal, which indicated that, year-on-year, DIIs have raised their holdings in 21 out of 24 sectors, with the most significant increases seen in Private Banks, Technology, Telecom, Real Estate, Healthcare, and Non-Banking Financial Companies (NBFC) focusing on lending.
Opinions among experts regarding the IT services sector remain divided. While some express caution due to uncertainties surrounding earnings in light of AI’s increasing integration, others view the current lower valuations as an opportunity for investment. A report from Kotak Securities last month pointed out that “AI deflation is becoming a reality,” projecting a base case of 3.5% for the industry, while acknowledging that a lag in new initiatives has resulted in growth forecasts that are weaker than anticipated. They highlighted that stock valuations are currently attractive for a sector facing numerous challenges.
