Despite global macroeconomic headwinds and the deflationary impact of artificial intelligence (AI), the Indian IT sector is projected to maintain a sustainable growth rate of 4-5%. This outlook, provided by HSBC Global Investment Research, suggests a moderate expansion exceeding the trendline of the past three years.
The sector's growth is facing a complex interplay of factors. While global headwinds and the increasing adoption of AI are creating pricing pressure and reducing the value of traditional IT service contracts, strong global demand for digital services, including cloud adoption and AI-driven customer experiences, is expected to sustain growth. HSBC anticipates a "push and pull" dynamic, particularly in 2026, where AI automation continues to reduce contract values, but overall demand for technology-driven solutions persists.
The HSBC report, released on October 3, 2025, indicates that a significant turnaround in the IT services sector is unlikely in the second quarter of FY26. Demand is expected to remain soft due to macroeconomic uncertainty and the ongoing impact of AI. However, analysts anticipate some recovery in growth in FY27, assuming less macro volatility in the coming quarters. This recovery is expected to be driven by a rebound in key export markets, particularly the US, and increased demand from IT companies looking to drive enterprise-scale AI adoption. The anticipated acceleration in demand for digital transformation and AI-led projects could improve revenue growth for Indian IT services companies by 200-300 basis points.
The report also highlights that vendor consolidation and cost-rationalization deals are driving growth in the second quarter, which HSBC terms a "zero-sum game". Furthermore, recent US corporate results indicate that companies are still holding back on discretionary new initiatives, adding to the uncertainty.
HSBC expects large-cap IT firms to achieve 0-2% sequential growth in dollar terms, while mid-tier companies may experience a decline of 1% to growth of 5.5%. The brokerage has downgraded the target prices of several IT majors, including Tata Consultancy Services, Infosys, and HCL Technologies, ahead of the Q2 results season. This reflects a view that these stocks are no longer the "five-year buy-and-hold compounding stocks" they once were, requiring more active management to navigate their cycles and volatility.
Yogesh Aggarwal, Head of Equity Research at HSBC India, noted that Indian IT firms are unlikely to return to their historical double-digit growth rates due to structural challenges. He believes that the industry's growth will likely stabilize at 4-5% over the medium to long term, with growth increasingly tied to US and European macro trends.
Despite the challenges, HSBC expects the IT industry to return to 5-6% growth next year, following a period of muted performance. However, over the medium term, structural limits related to the industry's size (currently $230-240 billion) will likely constrain rapid expansion. The rupee's depreciation of about 2.5-3% over the last 25 years is expected to continue contributing to overall EPS growth, supporting this growth expectation for medium to long-term investors.
