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Indian IT Sector’s Fiscal 2026 Outlook Dimmed by Weak US Demand and Trade Tensions

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India’s information technology (IT) sector, one of the worst-performing industries this year, is unlikely to see a strong recovery in fiscal 2026, according to analysts. The outlook remains uncertain, following recent warnings from Accenture, the world’s largest IT services firm, which cited weak discretionary spending and lackluster demand from its clients.

Accenture’s quarterly report flagged that client budgets remained flat, with little growth in discretionary project spending. The company also noted that global trade tensions, exacerbated by new U.S. tariffs, have further dampened prospects in the United States, a key market for Indian IT firms.

Amit Chandra from HDFC Securities noted that the last few months have heightened uncertainty about the first half of fiscal 2026 and how this will affect the overall recovery rate for the year. As of now, India’s IT index has dropped 15.3%, marking its worst performance since June 2022. Major firms such as TCS, Wipro, Infosys, and HCLTech have seen losses ranging from 11.2% to 18.1% this year.

Analysts from Kotak Institutional Equities warned that a soft recovery in demand and fewer mega deals in fiscal 2025 will result in slower revenue growth in fiscal 2026 for Indian IT companies. The impact of early-stage adoption of generative AI is also expected to present challenges, they added.

Research from Citi and Morgan Stanley forecast modest growth, with Citi estimating 4% revenue growth for IT companies in fiscal 2026, similar to fiscal 2025, and Morgan Stanley highlighting subdued client spending as a key factor limiting growth. However, sectors like banking, financial services, insurance (BFSI), and healthcare have shown some signs of recovery, although many clients are currently in a “wait-and-watch mode,” potentially leading to further reductions in spending.

Accenture’s report also indicated that U.S. clients have delayed or canceled new contracts, partly due to the Trump administration’s policies, which could increase competitive pressures in other segments, despite Indian IT companies having limited exposure to these delays.

Wipro Shares Surge on Optimistic Demand Outlook

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Shares of Wipro (WIPR.NS) surged approximately 8% on Monday, positioning the company for its best day in nearly four years. This sharp rise followed a positive earnings report and an optimistic outlook for future demand, echoing trends seen in its larger IT peers.

Key Highlights:

  • Strong Q3 Performance: Wipro reported better-than-expected third-quarter profits, signaling a recovery in demand within the IT services sector.
  • Optimistic Outlook: The company forecasts a 1% sequential revenue growth for the current quarter, compared to no growth last quarter. Wipro’s CEO, Srinivas Pallia, attributed this to a gradual return of discretionary spending despite ongoing macroeconomic challenges.
  • Improved Forecast: Wipro’s guidance for the upcoming quarter reflects a brighter outlook, with analysts noting that deal bookings—especially small- to mid-sized deals—point to a revival in discretionary tech spending.
  • BFSI Sector Growth: Wipro’s banking, financial services, and insurance (BFSI) segment saw an 11% increase in revenue, indicating a resurgence in spending in this key area.
  • Analyst Optimism: Following the positive earnings, at least eight brokerages raised their rating on Wipro’s stock, and 16 increased their price targets. Analysts also highlighted the company’s impressive operating margin, which reached a three-year high of 17.5%, driven by efficient deal execution.
  • Sector-Wide Optimism: Wipro’s outlook mirrors that of its larger peers, such as TCS, Infosys, and HCLTech, signaling a broader recovery within the $254 billion Indian IT services sector, which had struggled in recent quarters due to economic uncertainty and inflation.

TCS Sees Revival in Retail and Manufacturing Sectors After Banking Recovery

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Tata Consultancy Services (TCS), India’s leading software-services exporter, is optimistic about a recovery in its retail and manufacturing sectors in North America, following a strong rebound in its banking and financial services segment. The company’s CFO, Samir Seksaria, pointed to improved consumer sentiment, driven by strong holiday season sales in the U.S. and a resolution of some labor issues in the manufacturing sector, as key factors contributing to this optimism.

Seksaria’s comments reflect a cautious yet hopeful outlook, acknowledging the broader economic uncertainties and persistent inflation that have led clients to tighten their tech spending. Despite the challenges, TCS expects a recovery in its retail and manufacturing verticals, which are among its top revenue sources. Retail and manufacturing combined account for a significant portion of TCS’s $29 billion in annual revenue, with recent sales figures from major U.S. retailers like Walmart, Amazon, and e-commerce platforms such as Shein and Temu contributing to the positive outlook. U.S. online spending also saw a nearly 9% increase, reaching $241.4 billion during the recent holiday season.

However, the company continues to face a decline in its North American revenue for the fifth consecutive quarter, although the banking and financial services sectors have posted their strongest performance since mid-2023. TCS’s communications and media vertical, a high-investment segment currently underperforming, could also benefit from potential interest rate cuts, Seksaria suggested.

Echoing CEO Krithivasan’s sentiment, Seksaria noted that the incoming U.S. administration could remove policy uncertainties and boost client confidence, further encouraging investment in discretionary tech projects. As a result, TCS’s stock saw a 5.6% increase in a single day on Friday, marking its highest rise since July 2024.

TCS also addressed concerns about the increasing trend of insourcing by multinational corporations, which may reduce the outsourcing of IT services to companies like TCS. Many global companies are expanding their in-house teams and setting up global capability centers (GCCs) in India, which is projected to reach a $105 billion market size by 2030. While this could initially offer cost advantages, Seksaria pointed out that the cyclical nature of opening and closing GCCs may pose challenges for long-term sustainability.

TCS has also managed to adapt to this shift, acquiring units such as the captive arm of Danske Bank in 2023 and Post Bank AG’s unit in 2020, indicating a flexible approach to industry changes.