India’s ‘Reverse AI Trade’: Why Indian IT Could Be the Surprise Winner When the AI Hype Cools

Over the past two years, global equity markets have been swept up in an unprecedented artificial intelligence (AI) frenzy. A narrow group of mega-cap stocks—chipmakers, hyperscalers, and AI infrastructure leaders—has powered the rally in the US, Taiwan, and Korea markets. Capital has chased growth at any price, rewarding companies building the foundational structure of the AI revolution.

India, however, has largely stayed out of this party.

This divergence has given rise to a compelling contrarian theme: the “Reverse AI Trade.” The idea is simple yet powerful—when the global AI hype cycle matures or cools, capital may rotate away from over-owned, expensive AI hardware plays toward markets and sectors that were left behind. And India, particularly its IT services sector, stands out as a prime beneficiary.

What Exactly Is the ‘Reverse AI Trade’?

The Reverse AI Trade does not imply that India is anti-AI. Instead, it reflects the structure of India’s listed market. Unlike Taiwan, Korea, or parts of the US, India has limited direct exposure to AI hardware, semiconductor manufacturing, or cloud infrastructure. As a result, Indian equities did not participate meaningfully in the AI-led melt-up that drove global indices.

This divergence became evident in 2025. AI-heavy emerging markets now account for over 60 per cent of the MSCI Emerging Markets Index, while India’s weight is closer to 15 per cent. As global investors chased AI-driven narratives, India underperformed the MSCI Emerging Markets Index by about 24 per cent, even as the Nifty 50 delivered a 5.5 per cent gain over the last 12 months—an underperformance further compounded by a weakening rupee hovering around Rs 91 per dollar.

The underperformance was not due to weak fundamentals. India’s market leadership came from domestic cyclicals, financials, and services—areas largely distinct to the AI infrastructure boom. According to the Reverse AI Trade thesis, popularised by strategists like Jefferies’ Chris Wood, any slowdown in the AI trade—caused by valuation fatigue, power constraints, or earnings disappointments—could trigger a rotation into undervalued, cash-generative markets like India.

Here’s Why Indian IT Bore the Brunt of the AI Euphoria

Nowhere was this divergence more visible than in Indian IT services.

The Nifty IT index fell nearly 11.48 per cent in the last 12 months, making it one of the worst-performing sectors of 2025. This was a sharp reversal for a sector long seen as a secular compounder.

Several forces converged. Enterprise technology spending in the US and Europe slowed, decision cycles lengthened, and budgets were redirected toward AI infrastructure rather than traditional application development and maintenance. At the same time, generative AI raised concerns around automation-led disruption, while Global Capability Centres intensified the war for tech talent.

The financial impact was visible in H1FY26 numbers. Across nearly 60 listed IT companies, revenue growth hovered around 7 per cent, PBIDT (excluding other income) grew just 5 per cent, and PAT rose about 7 per cent. Large-cap IT firms dragged down averages, even as select mid-cap digital specialists quietly delivered resilient growth.

Meanwhile, global AI bellwethers surged, widening the performance gap and reinforcing the perception that Indian IT had lost its edge.

When AI Stocks Cool, Indian IT Starts Looking Interesting

The Reverse AI Trade argues that this gap may not be permanent.

The thesis is not that Indian IT must rebound simply because it has fallen. Rather, it is that as AI spending evolves from infrastructure-heavy capex to services-driven execution, Indian IT’s relevance could increase meaningfully.

Enterprises are already moving beyond AI pilots. The next phase involves integrating AI into legacy systems, ensuring data governance, securing workloads, and embedding AI into industry-specific processes. This is not the domain of chipmakers or cloud providers—it is the natural playing field of IT services companies.

If the global AI trade cools even modestly, investor focus may shift from narrative-driven growth to earnings durability, balance-sheet strength, and valuation comfort. On those metrics, Indian IT compares favourably.

Structural Tailwinds Supporting a Recovery

Several fundamental drivers strengthen the case for Indian IT in this next phase:

First, currency support. A weaker rupee acts as a natural hedge for export-heavy IT firms. With revenues largely denominated in dollars and euros and costs primarily in rupees, even modest depreciation can meaningfully support margins and earnings in a low-growth environment.

Second, the shift from AI infrastructure to AI services. The first wave of AI rewarded companies building data centres, GPUs, and cloud capacity. The next wave will reward those who can operationalise AI—migrating workloads, managing models, ensuring compliance, and delivering measurable business outcomes. Indian IT firms have decades of experience doing exactly this with cloud, ERP, and digital transformation.

Third, financial resilience. Most large and mid-cap IT companies in India operate with net-cash balance sheets, high return on equity, and strong free cash flow conversion. This enables dividends and buybacks, offering downside protection in volatile markets—an advantage many high-flying AI stocks lack.

Why Mid-Cap and Offshore-Heavy IT Firms Could Lead

Within the IT universe, leadership in the next cycle may not come from sheer scale.

Companies with a higher offshore delivery mix—often 60–70 per cent or more—enjoy structural cost advantages. As clients look to optimise spending after heavy AI and cloud investments, vendors that can shift work offshore without compromising quality stand to gain margin leverage.

Mid-cap IT firms also bring agility. Players such as Persistent Systems, Coforge, Ceinsys, and InfoBeans have demonstrated the ability to grow faster by focusing on niches like BFSI platforms, healthcare IT, ER&D, cybersecurity, and data engineering. Their smaller revenue base means a handful of successful AI-led deals can significantly accelerate growth.

Importantly, valuations across many mid-cap IT names have reset meaningfully after the sector correction. If global AI leaders de-rate and investors hunt for earnings-backed growth at reasonable prices, these companies could see disproportionate re-rating.

Additional Drivers to Watch

Several broader trends further strengthen the Reverse AI case for Indian IT.

Vendor consolidation is accelerating as global enterprises reduce partner counts, often favouring trusted Indian vendors for multi-year, multi-tower contracts. Regulation and data governance are also becoming critical as AI adoption scales, playing to the strengths of compliance-focused IT service providers.

India’s deep STEM talent pool, combined with rapid upskilling in AI, data engineering, and cybersecurity, continues to underpin its role as a global technology services hub. Even as wages rise, the cost-to-skill equation remains compelling compared to onshore alternatives.

The Bottom Line: Agility Over Hype

In the near term, FY26 is likely to see muted growth, cautious client spending, and delayed deal ramp-ups. FPI flows may remain volatile, and large-cap IT could continue to face pressure.

But the bigger story is changing. As the AI narrative matures, the market may increasingly reward companies with execution capability rather than pure infrastructure exposure. In that world, Indian IT—especially agile, offshore-heavy mid-caps—looks well positioned.

The Reverse AI Trade is not about betting against AI. It is about recognising that when hype fades, fundamentals matter. And on currency tailwinds, cost competitiveness, cash flows, and real-world AI implementation, Indian IT checks more boxes than the market currently gives it credit for.

Disclaimer: The article is for informational purposes only and not investment advice.