The Nifty IT Index fell another 4 percent in morning trade Wednesday, closing at 33,583—a level that marks a deep 11 percent decline in CY2026 alone. What started as isolated selloffs around AI announcements has hardened into a sustained downtrend, its apparent, with each relief rally failing to reclaim lost ground. The chart tells an unambiguous story: the sector is de-rating.
The DeepSeek Episode: Overreaction or Preview?
The latest trigger was DeepSeek’s release in late January, which caused a sharp but brief selloff. Nirmal Bang characterized it as “an overreaction but a wakeup call for Indian IT” in their February 5th note. The brokerage observed that “Indian IT was hit by global contagion rather than domestic deterioration. NIFTY IT fell 5.87% in a single session, with Tier 1 names down between 4% and 7%, despite no change in near term revenue visibility or TCVs.”
The analysis highlighted that this wasn’t about Indian companies’ fundamentals deteriorating immediately, but rather “a spillover from the sharp de-rating in US enterprise software and consulting stocks. Thomson Reuters Corp and Legalzoom declined 16% and 20% respectively.”
But here’s the uncomfortable question: if revenue visibility remains stable and Total Contract Value (TCV) hasn’t changed, why has the sector lost nearly a quarter of its value? The answer lies in what the market is pricing in—not current earnings, but future viability.
The Real Threat: Time Compression
Nirmal Bang identified the core issue with precision: “Palantir and Anthropic accelerated the re-pricing by attacking time and workflow economics.”
The note explained that “Palantir’s claim that SAP ECC to S/4 migrations can be done in weeks rather than years, directly compresses duration, labour intensity, and client lock in.” These migrations are traditionally 18-24 month projects that generate massive billable hours for Indian IT firms. Compress them to weeks, and the revenue model collapses.
More concerning is what Anthropic demonstrated: “Claude Cowork plugins showed how quickly foundation model providers can ship end to end workflows across legal, sales, and analytics.” The critical observation: “When execution moves to the model layer, wrapper software and services lose insulation almost instantly.”
Indian IT companies positioned themselves as the essential layer between complex enterprise software and end users. When AI models can execute workflows directly, that layer becomes redundant.
The Stagnation Signal
Perhaps most telling is what Nirmal Bang noted about deal activity: “TCV has remained almost flat since Q1 FY25, indicating that AI rhetoric has not yet translated into larger or longer deals.”
Three years into the AI revolution, after countless announcements about AI partnerships and AI-first strategies, Indian IT firms aren’t seeing bigger contracts or longer engagements. The AI opportunity they keep talking about isn’t showing up in the numbers.
This flatness in TCV is actually worse than decline. Decline would suggest clients are cutting budgets across the board—a cyclical problem. Flatness suggests clients are waiting, testing alternatives, uncertain whether they need traditional IT services at previous levels in an AI-driven world.
The Strategic Deficit
Nirmal Bang’s conclusion was blunt: “AI built as a wrapper will not defend growth or margins. Indian IT firms must either build AI from the ground up or acquire core model capabilities.”
The sector is being repriced based on a simple reality: AI is compressing the time and labor required for work that generates most of Indian IT’s revenue. TCV staying flat confirms clients see this too.
For investors, the question is where a bottom at all, as it seems like a long, grinding decline as the market slowly prices in a future where traditional IT services are a fraction of their current size. And regularly updates and plugins from the AI biggies an new developments can keep the pressure on for the IT sector.
What Investors Should Watch
For those tracking the sector, several metrics matter:
TCV and deal duration: If this doesn’t improve by mid-2026, it confirms clients are reducing commitments.
Margin trajectory: Compression is inevitable as productivity gains get shared with clients. Companies maintaining margins aren’t transforming.
Talent flows: Watch where the best technical talent goes. If IIT graduates increasingly choose AI startups over IT services firms, that’s a leading indicator of long-term irrelevance
