The Nifty IT index, a key indicator of the Indian Information Technology sector's performance, has experienced a significant downturn, plunging 13% year-to-date. This decline reflects a confluence of global economic headwinds, evolving technological landscapes, and shifting trade dynamics between India and the United States. As the calendar turns to 2026, the critical question is whether a potential India-US trade deal and anticipated Federal Reserve (Fed) rate cuts can revitalize the index.
Several factors have contributed to the Nifty IT's underperformance. The Indian IT sector, which derives a substantial portion of its revenue (over 60%) from US clients, is susceptible to changes in US economic policy and market conditions. Rising protectionism, as evidenced by increased US tariffs on Indian exports, has created uncertainty. While the Indian IT sector hasn't been directly targeted by tariffs on goods, the resulting reduced tech spending from US clients facing cost pressures have had a ripple effect.
Furthermore, the sector is grappling with internal challenges, including slow revenue growth, increasing layoffs, and client hesitations. Automation and the adoption of Artificial Intelligence (AI) are transforming the industry, prompting companies to realign their workforces. Tata Consultancy Services (TCS), for instance, reduced its global workforce by approximately 2% in 2025.
However, there are potential catalysts on the horizon that could reverse the Nifty IT's fortunes in 2026. One significant factor is the prospect of an India-US trade deal. Negotiations between the two nations have been ongoing, with expectations of a potential agreement by the end of 2025. The core of India's negotiation is focused on reducing tariffs on goods and services exports of IT and IT-enabled services. In return, the US is likely to seek greater market access for its digital and e-commerce firms in India. A successful trade deal could reduce reciprocal tariffs, which would provide a competitive edge for Indian IT companies in the US market.
Another potential tailwind is the anticipated Federal Reserve rate cuts. The US Federal Reserve's decision to lower interest rates generally has a positive impact on the technology sector. Lower interest rates reduce borrowing costs, making it easier and cheaper for companies, especially startups, to access loans. This can fuel innovation, expansion, and hiring. Rate cuts also increase the value of future cash flows, raising company valuations and driving more investment into the sector. JM Financial identified three key effects of rate cuts which include increased stock multiples due to a lower cost of equity, potential revival in discretionary demand as the economy recovers, and reduced interest burdens on corporations, allowing for higher operational expenditures.
The Fed's easing cycle has catalyzed optimism in India's IT sector, which surged 1.3% immediately post-announcement. Leading firms like Tata Consultancy Services and Infosys gained 2.8% and 3.1%, respectively, as investors anticipated a softer dollar and renewed U.S. corporate spending.
Looking ahead to 2026, several reports suggest a positive outlook for the broader Indian equity markets, including the Nifty 50. One report forecasts that the Nifty may touch 27,000 by March 2026. JPMorgan expects the Nifty 50 to trade between 26,500 and 30,000 over the next nine months.
The Nifty IT's trajectory in 2026 hinges on the interplay of these factors. While the index faces challenges, a comprehensive India-US trade agreement and strategic Federal Reserve rate cuts could provide the necessary impetus for a rebound. Investors will be closely watching these developments as they assess the future prospects of India's crucial IT sector.
