According to a report released on Friday, India’s IT services sector is expected to experience sustainable growth of approximately 4 to 5 percent, surpassing the trendline observed over the past three years. Analysts project reduced macro volatility in the upcoming quarters and foresee a recovery in growth during FY27, as stated by HSBC Global Investment Research. The report indicates that the IT services sector is not likely to see a significant turnaround in Q2 of FY26, with demand remaining subdued due to macroeconomic uncertainties and the deflationary effects resulting from artificial intelligence. These conditions may persist until FY27, as global challenges continue to mitigate pricing pressures, the report noted, while endorsing a ‘buy’ rating on various IT stocks.
Growth during the second quarter is anticipated to align with that of the first quarter, primarily fueled by vendor consolidation and cost-rationalization agreements, which HSBC characterized as a ‘zero-sum game.’ The report emphasized that the sustainable growth rate for the sector is unlikely to exceed 4-5 percent, especially since growth has fallen below this trend rate in recent years. While FY24 and FY25 faced setbacks due to market share losses to GCCs, FY26 is suffering from both AI-induced deflation and ongoing macro uncertainties. Despite robust recent results from US corporations, companies remain cautious about launching new discretionary initiatives.
Quarterly forecasts suggest that large-cap IT firms might achieve 0-2 percent sequential growth in dollar terms, while mid-tier firms could see a decline of 1 percent or growth of up to 5.5 percent, according to the firm’s predictions. Furthermore, the firm cautioned that large-cap IT stocks should no longer be viewed as five-year buy-and-hold investments but rather require active management in response to their inherent cycles and volatility.