Why IT Stocks Are Falling and Why This Time Feels Different

Between 30 January 2026 and 13 February 2026, the Nifty IT index fell from 38,036 to 32,681, a decline of ~14% in just two weeks. This is not a routine pullback. While global technology stocks have corrected before, the speed, depth and breadth of the fall in Indian IT stocks suggest that the market is reassessing the sector’s long-term earnings durability, not just near term growth.

To understand what is happening, we need to separate short-term triggers from structural concerns.

The Immediate Trigger: Global Risk-Off + US Tech Weakness

Indian IT stocks remain deeply linked to the US technology cycle. Over 55–60% of revenues for large IT companies come from North America. When US tech stocks sell off, Indian IT usually follows. In early February:

• Nasdaq corrected sharply on stronger than expected US jobs data
• Rate cut expectations were pushed out
• Growth stocks globally saw valuation compression

This created the first leg of selling. But that alone does not explain a 14–15% fall in two weeks.

The Second Layer: Valuations Had Little Cushion

Before this correction, Indian IT stocks were not cheap. Despite muted growth, large IT companies were trading at 25–28x earnings and revenue growth guidance for FY26 was largely 0–5%. In a higher for longer interest rate world, markets are less willing to pay premium multiples for low growth. Once selling began, there was no valuation floor to absorb pressure.

AI Anxiety: The Narrative That Accelerated the Fall

The most visible trigger for panic selling was the launch of agent-based AI tools by Anthropic, particularly automation tools that can handle coding, legal review and routine enterprise workflows. This reignited a long-standing fear: Is AI directly attacking the labour arbitrage model that Indian IT is built on? The market reaction was not about today’s revenue loss but about future pricing power. If:

• Fewer people are needed per project
• Turnaround times compress
• Clients internalise more work

Then, billing rates and volumes will come under pressure. That uncertainty hit sentiment hard.

Are AI Fears Overstated? Partially Yes But Not Irrelevant

What Is Logically Correct

• AI will reduce manpower intensity in certain coding and maintenance tasks
• Routine, repeatable work faces pricing pressure
• Productivity gains will first benefit clients, not vendors

What Is Overstated

• AI will not replace large IT vendors overnight
• Enterprise clients still need integration, governance and accountability
• AI adoption itself requires a system overhaul, often done by an IT services firm

So this is not an existential threat, but it does compress the traditional revenue model. Markets are discounting that risk early.

The Bigger Structural Issue: Rise of GCCs 

GCCs are known as Global Capability Centres and this is the least discussed but most important factor. Over the last 5–7 years, global corporations have increasingly:

• Set up their own captive centres in India
• Hired talent directly
• Internalised work that was earlier outsourced

These GCCs are no longer just back offices. They handle:

• Service development
• Analytics
• Cloud engineering
• AI and data science

This is a structural shift. Work that once generated steady annuity-style revenue for Indian IT companies is now moving in-house for clients. That impacts:

• Long-term deal sizes
• Vendor bargaining power
• Talent retention

This is not a one-quarter problem. It is a slow erosion issue.

Talent Is Being Pulled from Both Ends

Indian IT firms now face a two-sided squeeze:

• Bottom-end work faces automation
• Top-end talent is absorbed by GCCs, offering better pay and ownership

This makes it harder to:

• Upgrade the skill pyramid
• Justify margin expansion
• Invest aggressively in R&D

Markets are increasingly sensitive to this imbalance.

Cash Flow Is Strong, But Reinvestment Is Weak

One uncomfortable truth is that Indian IT companies generate enormous free cash flow but reinvest very little of it. Large players return most cash via: Dividends and Buybacks.

While this supports shareholder yield, it also signals: Limited confidence in high return reinvestment opportunities and conservative risk appetite. In an era defined by AI-led disruption, markets prefer companies that build optionality, not just distribute cash.

Why the Fall Feels Sharper Than Past Corrections

Earlier IT corrections were cyclical: 2008: Global recession, 2016: Automation fears and 2022: Rate hikes and tech de-rating.  This phase is different because multiple pressures are converging: Low growth visibility, structural client behaviour change, rapid technology shifts and high starting valuations. That combination explains the speed of the fall.

What the Market Is Really Saying

The sell-off does not mean Indian IT is finished. It means:

• The old comfort premium is gone
• Markets want evidence of reinvention
• Cash flow alone is no longer enough

Stocks are being repriced from Stable compounders to ex-growth utilities with disruption risk.

What to Watch Going Forward

Instead of reacting to price moves, investors should track:

• Client commentary on deal size and duration
• Pricing trends, not just volume growth
• AI-led revenue contribution clarity
• R&D and platform investments
• GCC competition disclosures

The next leg of performance will be driven by adaptation, not legacy scale.

Conclusion

The February 2026 correction in IT stocks is not just a market tantrum. It reflects a reset of expectations. Indian IT companies remain cash generative and relevant, but the market is no longer willing to pay premium valuations without clear evidence of: Structural evolution, Service-led growth and AI-driven differentiation.

This is not the end of Indian IT. But it is the end of easy narratives. The next cycle will reward those who build capability, not those who only defend margins.

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