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AI Deflation Hits Indian IT, But Strong US Demand Offers Relief

A new HSBC report highlights a significant AI-driven deflationary pressure of 14-16% on India's IT sector. However, this could be largely offset by robust earnings from top US corporate clients and increased investment in enterprise software and AI adoption. The sector might see a shift from conservative to more realistic or aggressive financial guidance. The report identifies upcoming FY27 guidance from major IT firms in April as a critical catalyst for the industry's valuation.

Key Points: AI Deflation vs. US Demand: The Outlook for Indian IT

  • AI may cause 14-16% deflation
  • Strong US corporate earnings could offset impact
  • Sector may shift to more aggressive guidance
  • FY27 guidance in April is key catalyst
2 min read

AI-related deflation for Indian IT firms likely to be offset by stronger demand: Report

HSBC report says AI-driven deflation for Indian IT may be offset by robust US corporate earnings and incremental tech investment, leading to net growth.

"Improving business outlook and AI-led productivity gains should drive incremental investment - HSBC Report"

New Delhi, March 9

India's IT sector faces a 14-16 per cent AI‑driven deflation but robust US corporate earnings in Q4 2025 and incremental investment could offset much of the hit, a report said on Monday.

The report from HSBC Global Investment Research said these factors could lead to mid-single digit 'net' growth for some IT companies on a net basis.

Top US corporate results (clients of Indian IT) remain robust in Q4 2025 and notably, the forward earnings expectations of the S&P 500 were upgraded further.

"Improving business outlook and AI-led productivity gains should drive incremental investment in enterprise software migration, legacy tech modernisation and AI adoption," the report noted.

The research firm also predicted that Indian IT companies may shift away from 'beat-and-raise' guidance to more 'realistic to even aggressive' guidance.

"For both the believers and sceptics of AI there remains a lack of substantial real-world tangible case studies to support claims of AI cannibalisation of traditional software," the report said, adding that the AI narrative and uncertainty are driving the stock valuation de-rating.

"Unfortunately for the sector, there are no high-frequency data to counter the AI narrative," it said, pointing to FY27 guidance from major IT companies in April as the most important catalyst for the sector.

The macro backdrop is quite favourable for the sector as most top clients are reporting strong earnings. However, there could be some pause in spending due to the rapidly evolving frontier AI models and uncertainty around the adoption curve which could affect near-term demand, the firm forecasted.

Despite the short-term pressures on profitability, IT companies saw improving demand conditions in the December quarter, with artificial intelligence moving from experimentation to operational deployment and influencing deal pipelines and hiring.

Major IT companies have either revised or raised their revenue guidance for the year, while management commentary from other companies highlighted strong expectations around artificial intelligence-led growth.

- IANS

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Reader Comments

P
Priya S
Finally some clarity! All we hear is "AI will eat jobs". This report shows it's more about productivity and new investment. Strong US earnings are the real safety net for our IT exports. 🇮🇳
R
Rohit P
The lack of "real-world case studies" point is crucial. A lot of hype, but where are the tangible results showing massive job loss? Companies are still hiring for AI roles. The pause in spending due to evolving models is the bigger short-term risk.
S
Sarah B
Working in Bangalore tech, this mirrors what we see on the ground. The move from experimentation to operational deployment is happening, but it's messy. Management needs to be transparent about the adoption curve with employees.
V
Vikram M
Mid-single digit net growth is not bad considering the global headwinds. Our IT sector has navigated worse. The focus should be on legacy modernisation deals—that's a huge, steady revenue stream while the AI story matures.
K
Karthik V
Respectfully, reports like this often miss the ground reality for mid-tier IT employees. "Improving demand" doesn't translate to job security if you're working on legacy tech. The reskilling push needs to be much more aggressive and accessible.
A
Ananya R

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