India’s information technology sector is undergoing one of its most severe market corrections in recent memory, with the Nifty IT Index on track for its worst February performance in 23 years. The sharp decline underscores growing investor anxiety that artificial intelligence could fundamentally alter the economics of outsourced software services - a model that has powered India’s services exports for decades.

The index has fallen about 21 percent in February 2026, its steepest monthly drop since April 2003. In market-value terms, the selloff has erased more than ₹6.4 lakh crore in capitalisation. The decline has been broad-based across large-cap IT names, signalling a sectoral repricing rather than company-specific weakness.

Among major constituents, Infosys has declined about 21 percent so far this year, Tata Consultancy Services around 19 percent, and Wipro roughly 24 percent. Tech Mahindra and HCL Technologies have also recorded double-digit losses, down about 16 percent and 18 percent respectively. The breadth of declines suggests investors are reassessing the entire business model of export-oriented IT services firms rather than reacting to short-term earnings trends.

At the core of the selloff is a growing belief that generative AI and automated coding tools could reduce demand for large offshore development teams. A research scenario cited by market participants suggests contract cancellations for major Indian vendors could accelerate over the next few years as enterprises adopt AI-driven software development. The marginal cost advantage that once defined Indian outsourcing lower-cost human labour may erode if software can increasingly be generated at near-zero incremental cost.

This concern strikes at the heart of India’s services economy. The IT sector generates over $200 billion in annual exports and is a key contributor to the country’s current account balance, offsetting the structural deficit in merchandise trade. Any structural slowdown would therefore carry macroeconomic implications beyond equity markets.

Institutional flows reflect the shift in sentiment. Mutual fund exposure to IT stocks has fallen sharply, with combined holdings dropping by more than ₹70,000 crore within a month. Foreign institutional investor positions have also declined significantly, reaching the lowest level in four years by mid-February. Such simultaneous selling by domestic and overseas investors indicates a coordinated reassessment of sector prospects rather than tactical portfolio rebalancing.

Global brokerages are divided on the long-term implications. Some analysts argue AI will fundamentally reshape the industry, shifting revenue mix toward consulting, system integration, and implementation work while shrinking traditional managed services. This transition could increase earnings cyclicality and force companies to overhaul talent models and pricing strategies.

Even though recent quarterly results prompted earnings upgrades, analysts note that stock performance is now being driven more by long-term structural concerns than near-term financial delivery. In a moderate growth scenario, large IT firms could sustain valuations broadly in line with historical averages. However, slower growth assumptions could lead to significant multiple compression, especially for firms heavily reliant on legacy outsourcing contracts.