IT Sector Correction: Buying Opportunity in India IT ETFs

The IT sector correction has brought India’s technology pack back into sharp focus. The Nifty IT index had fallen about 20% since the start of the calendar year 2026 at the start of April 2026 and around 34% from its December 2024 peak, even though operating performance has remained relatively stable and deal wins have continued.

That disconnect is what makes this phase worth examining closely. For investors evaluating IT ETF India strategies, the question is not just whether IT has corrected, but whether the reset has opened up a credible thematic investment opportunity.

The big picture: why the IT sector has corrected so sharply

The recent fall in Indian IT stocks is being driven by three broad factors

Rising concerns around Generative AI and its long-term effect on the IT services business model
Macro uncertainty
Geopolitical risks

Large-cap and midcap IT names have corrected meaningfully as investors reassess near-term growth visibility and the structural impact AI could have on traditional service-delivery models.

At the same time, the sector has not collapsed operationally. Operating performance has stayed relatively stable, and deal wins have continued. The market has simply become more cautious about what future growth may look like.

A second layer of the correction is the growing belief that AI can automate tasks historically handled by IT services firms. Announcements from AI platform companies such as Anthropic, OpenAI and Palantir have added to that anxiety. These developments point to AI tools that can:

Automate contract review in legal workflows
Identify software vulnerabilities in cybersecurity
Accelerate ERP migrations from ECC to SAP S/4
Modernise legacy code, such as COBOL

Each such development has intensified the debate around the future relevance of traditional outsourcing models.

Why is the fear centred on AI?

The core concern is simple. AI can improve productivity in software development and maintenance, potentially reducing the number of engineers required for certain tasks.

Industry commentary suggests this could lead to annual deflation of 2% to 3% in traditional services revenues over the next couple of years as automation improves delivery efficiency and compresses effort-based pricing models.

That creates pressure on the traditional FTE-led revenue structure of IT services companies. In the near term, this can produce a deflationary phase. Productivity gains may reduce revenue growth before fresh AI-led demand becomes large enough to offset that pressure.

Why is the long-term case still alive?

The longer-term argument is not built on the denial of disruption. It is built on how the industry has historically adapted.

Indian IT has already lived through major technology transitions, including

ERP adoption
Cloud migration
Digital transformation cycles

Those transitions initially slowed or reshaped revenue growth, but they eventually expanded the total addressable market for IT services companies.

The same possibility is now being discussed for Gen AI. While AI may compress certain service lines early on, it may also create a much larger market over time by expanding automation and accelerating enterprise transformation.

Enterprises adopting AI solutions will still need providers that can customise, implement and manage these technologies within complex business environments. Indian IT services firms remain well placed for that role.

A quick snapshot of where the sector stands

Here are the most important numbers shaping the current debate around the Nifty IT index

Metric	Nifty IT Index	Nifty 50 Index
Fall from highs	-34%	-14%
Period since highs	16 months	15 months
Earnings growth in 2025	8%	4%
Average trailing PE, 20 years	24.6	20.4
Average trailing PE, 10 years	28.8	22.9
Current PE	23.3	19.8
ROE	32%	18%
Dividend yield	3.45	1.44
PE premium, last 10/20 years	23% to 24%	23% to 24%
Current PE premium	18%	18%

*As of April 3rd

A few points stand out immediately

The sector has corrected much more than the headline index.
Earnings growth in 2025 is still higher than the Nifty 50.
Current PE is below the 10-year average.
Dividend yield remains materially stronger than the broader market.
PE premium over the Nifty 50 has narrowed from about 23% to 24% historically to 18% currently.

In simple terms, the valuation reset has been meaningful.

Performance history: IT has been a stable, long-term sector

One of the strongest arguments in favour of the sector is consistency. The IT index has delivered positive returns in 13 out of the last 17 calendar years.

As of 31 March 2026, the Nifty IT TRI had delivered

10-year CAGR of 12.2%
5-year CAGR of 4.3%

Before the recent fall at the start of April, as of 1 December 2024, those numbers stood at

16% for the 10-year period
26% for the 5-year period

Nifty IT TRI annual returns

Year	Return (%)
2010	30.8
2011	-17.0
2012	-0.2
2013	60.2
2014	20.1
2015	1.5
2016	-5.3
2017	14.5
2018	25.9
2019	11.0
2020	57.9
2021	62.3
2022	4.9
2023	-24.5
2024	26.3
2025	24.2
2026	-10.4
YTD	-14.4

This history does not remove current risks, but it does show that IT has been one of the more stable and consistent sectoral performers over time.

What “deflation without demand offset” means for IT

This is one of the most important ideas in the entire debate.

In the near term, AI can improve productivity so quickly that revenue growth slows before fresh demand arrives in size. That means the sector can feel the pain of efficiency gains before it enjoys the full benefit of new AI-led spending.

This is why the initial phase of Gen AI adoption is being seen as deflationary.

Companies are trying to reposition themselves as AI-led transformation partners, but the market remains cautious until those AI opportunities scale from experimentation and pilots to wider enterprise adoption.

The macro risks are real too

AI is not the only reason behind the correction. External factors have also weighed on sentiment

Weakness in global technology and SaaS stocks
Slower growth expectations
Uncertainty around structural changes in enterprise technology spending

There is also a broader macro risk. A prolonged US-Iran conflict could keep the Federal Reserve on a higher-for-longer path and delay planned rate cuts until 2027. That, in turn, could delay consumer spending.

So the correction is not being driven by a single issue. It is a mix of AI concerns, valuation reset, global sentiment, and macro uncertainty.

The long-term opportunity may be larger than the near-term pain

This is where the investment case becomes more interesting.

Industry estimates suggest AI-led services could create an incremental TAM of USD 300 billion to USD 400 billion by 2030. That is significant when compared with the current size of the Indian IT services industry, which is described at roughly USD 280 billion in one section and USD 280 billion to USD 285 billion in the sector sizing framework.

The same long-term view also suggests

170 million new jobs could be created
92 million traditional jobs could be displaced

That does not mean the transition will be smooth. It means the medium- and long-term opportunities may outweigh the near-term revenue pressure.

Industry size, risks, and opportunity: the numbers that matter

Category	Data point
Global IT industry	USD 1 trillion+
Indian IT industry	USD 280 billion to USD 285 billion
Indian IT export	USD 225 billion
Indian IT domestic	USD 60 billion
Share of the IT services industry seen at risk from GenAI-led deflation	~30%
Base case impact at the India level	USD 40 billion
Worst-case impact	USD 80 billion to USD 85 billion
Annual deflation is expected in the scenario framework	2% to 3% over 3 to 4 years
AI-led incremental TAM by 2030	USD 300 billion to USD 400 billion
Traditional jobs displaced	92 million
New jobs created	170 million
Peak impact window	FY26 to FY28
Recovery window	FY28 end / FY29 onward

The scenario framework also flags specific near-term pressure points

Automation in coding, application development, and maintenance can reduce FTE demand
Effort-based pricing models can compress margins in areas such as ADM, coding and testing
The traditional outsourcing model remains under scrutiny
For the next 1 to 2 years, Gen AI is expected to be used mainly for pilot programmes and ROI validation

At the same time, the same framework points to the back-ended upside

Indian IT services companies can become AI implementation partners
AI pilots can move into enterprise-wide deployment at scale
New roles can emerge around AI engineering, AI forensics and AI leadership

Does AI replace IT services firms or work alongside them?

The stronger case here is partnership, not replacement.

AI platform providers are increasingly expected to rely on IT services firms as implementation partners. Enterprise AI adoption still requires:

Integration with legacy systems
Data governance
Workflow integration
Deployment at enterprise scale

This follows the pattern of earlier technology cycles, when product companies depended heavily on system integrators for enterprise-wide implementation.

So while AI changes the shape of work, it does not automatically eliminate the role of IT services companies.

How the job mix may change

The shift is not just about revenue lines. It is also about talent demand.

Fastest declining IT jobs	New/upcoming IT jobs
Front-End Web Developers	Data Annotator
QA Testers	AI Engineer
IT Support Specialist	AI Forensic Analyst
Blockchain Developers	Forward Deployed Engineers
	AI leads

The implication is clear. The sector is not only automating. It is also reallocating value toward higher-growth AI skills.

The two phases of AI impact on IT services

The likely path is split into two stages.

Stage 1: Deflationary phase

In this phase

Automation improves productivity
Service effort requirements fall
Revenues come under pressure before new demand scales up
Additional manpower requirements decline

Stage 2: Expansion phase

In this phase

Enterprise AI adoption accelerates
Transformation programmes move from pilots to scaled implementation
The total addressable market expands
Higher-value services begin to offset the earlier deflationary effect

This is also why the rebound is being seen as back-ended and execution-driven.

A CEO's view on what AI could do

One company commentary captures the dual effect of AI quite clearly.

The view shared is that AI may cause an estimated 2% to 3% annual deflation across services, but it also opens up a large new growth opportunity. AI is currently 4%, growing 20% quarter on quarter, and has the potential to reach USD 2.5-3 billion, which could more than offset some of the decline in the existing business.

That neatly sums up the present market debate. Near-term pressure is real, but so is the scale of the long-term upside.

Screening the best IT ETFs to buy: the current Nifty IT ETF universe

For investors researching the best IT ETFs to buy, the current listed Nifty IT ETF universe offers a range of options by size and cost.

IT ETF universe

IT ETF	AUM (₹ crore)	Expense Ratio
ICICI Pru Nifty IT ETF	450	0.20
Kotak Nifty IT ETF	389	0.09
Aditya Birla SL Nifty IT ETF	186	0.19
Axis NIFTY IT ETF	158	0.23
Mirae Asset Nifty IT ETF	144	0.10
DSP Nifty IT ETF	97	0.20
SBI Nifty IT ETF	68	0.20
HDFC NIFTY IT ETF	62	0.20
UTI Nifty IT ETF	6	0.18

Data above is for February-end 2026.

What a representative IT ETF holds

A sector ETF reduces individual-stock selection risk by spreading exposure across the index's basket.

Representative ETF holding mix

Company Name	Holding
Infosys Ltd.	29%
Tata Consultancy Services Ltd.	22%
HCL Technologies Ltd.	12%
Tech Mahindra Ltd.	10%
Wipro Ltd.	7%
Persistent Systems Ltd.	6%
LTM Ltd.	5%
Coforge Ltd.	5%
Mphasis Ltd.	3%
Oracle Financial Services Software Ltd.	2%

This is also why sectoral ETFs appeal to investors seeking IT ETF India exposure without taking on single-stock risk.

So, is this correction a buying opportunity?

The current reading remains balanced.

Near term, the sector may face growth moderation because of AI-led disruption and macro uncertainty. Over the medium term, however, Gen AI is expected to expand the technology services opportunity by accelerating automation and digital transformation.

That is why the present phase is being viewed as a transition rather than a straight breakdown.

A few points support the idea that this may be a credible thematic investment opportunity:

Most quantitative parameters now look more attractive than historical averages
PE is at its lowest level since 2019
Dividend yield is around 3.5%
The sector has already gone through a long consolidation of about 16 months
Long-term growth potential remains intact even after the valuation reset

The view on allocation is also clearly defined:

A one-year monthly SIP in an IT ETF, over the next one year, with a 2 to 3-year investment horizon, has the potential to outperform headline indices
This is best suited to aggressive investors because IT ETFs are concentrated and thematic
For most investors, a diversified allocation through a Nifty 50 ETF should remain the core holding

Final take

The sell-off in IT is not being treated as a random market wobble. It reflects a real repricing around AI, margins, delivery models and global uncertainty.

Yet the same set of numbers also shows why the sector is still under close watch. Valuations have come down, long-term industry size can expand meaningfully, and Indian IT firms may still play a central role as AI moves from pilots to scaled enterprise deployment.

So the answer is not that the sector is free of risk. It is possible that the opportunity may outweigh the risk if the sector can cross the current deflationary phase and capture the larger AI-led expansion cycle.

Read full report here - https://www.icicidirect.com/mailcontent/idirect_etf_ofthe_month_it_april26.pdf