India's IT sector is showing signs of recovery in the second half of 2025, particularly in the US and European markets, driven by a resurgence in the Banking, Financial Services and Insurance (BFSI) sector. This comes after a prolonged period of sluggish global technology spending. While challenges persist in some sectors, increased deal closures and team expansions offer a promising outlook for the industry.
BFSI Sector as a Growth Driver
The BFSI sector has emerged as a key growth engine for Indian IT companies in the Americas. Banks are reporting strong earnings, leading to a potential loosening of discretionary technology spending. This is a significant shift, as the BFSI vertical is the largest customer base for the Indian IT industry, constituting a substantial portion of its revenue. Analysts expect the BFSI vertical to lead the recovery for IT firms, particularly with increased digital usage and stable spending outlook by large banks in the US and Europe.
Offsetting Pressures from Other Sectors
The positive momentum in the BFSI sector is helping to offset lingering pressure from other verticals such as telecom, retail, and automotive. While some clients remain in a "wait-and-watch" mode, industry executives and analysts view the second quarter results as a turning point.
Positive Indicators and Outlook
Healthy deal bookings, rising headcounts, and protected margins signal a stronger outlook for the second half of the fiscal year ending March 2026. HCL Tech, for example, has raised its lower end of IT services revenue growth to 4-5% in constant currency terms. The company's new bookings reached $2.6 billion in Q2, driven by demand in modernization deals and AI-infused solutions.
Cautious Optimism and Strategic Actions
While expressing optimism for an improved performance in the second half of the year, executives also acknowledge the need to overlay seasonality and the broader economic context. Companies are focusing on strategic actions and execution to navigate the uncertain macro environment. Some expect the demand environment to remain challenging for the next few quarters due to macroeconomic uncertainty. However, they remain positive about the medium-to-long-term outlook, anticipating a revival in spending as the macro situation improves.
AI as a Catalyst
Artificial Intelligence (AI) is expected to play a significant role in the IT sector's growth. A large percentage of employers do not foresee significant job losses due to AI, and instead believe AI will act as a catalyst for job creation, especially in emerging roles. Sectors like IT, analytics, and business development are expected to see fresh demand for talent with AI-related skills.
India's Strengths
India's cost competitiveness, a large skilled talent pool, and high R&D intensity continue to underpin long-term growth in the IT sector. The Indian IT sector, despite recent underperformance, offers a contrarian opportunity with strong fundamentals, robust cash flows. Large-cap valuations are also comfortable, making selective stock picking in themes like BFSI potentially rewarding.
