Foreign Investors Flee Indian IT Sector as AI Revolution Sparks Business Model Concerns
Foreign institutional investors (FIIs) are executing a dramatic retreat from India's technology sector, driven by mounting apprehension that rapid advances in artificial intelligence could fundamentally undermine the traditional software services business models that have long served as the foundation of the country's IT industry.
Massive Capital Exodus from Technology Stocks
In a striking display of sector-specific caution, FIIs pulled out a substantial Rs 10,956 crore from Indian IT stocks during just the first fortnight of February. This aggressive selling follows sustained outflows throughout 2025, when foreign investors had already offloaded IT shares worth Rs 74,698 crore, with additional selling of Rs 1,835 crore recorded in January.
The catalyst for this intensified withdrawal appears to be the launch of sophisticated new AI models, including Claude Cowork and advanced tools developed by Palantir. These technological breakthroughs have amplified fears that highly autonomous systems could significantly reduce corporate dependence on conventional IT services providers, potentially rendering traditional outsourcing models obsolete.
IT Stocks Under Severe Pressure
The sectoral sell-off has translated into substantial market losses. The Nifty IT index has declined approximately 13 percent since the beginning of the calendar year, with several frontline stocks experiencing particularly sharp corrections.
Major technology companies have witnessed significant declines:
- Wipro has fallen 19 percent
- LTIMindtree has dropped 22 percent
- LTTS has declined 14.5 percent
- Infosys and other major counters have registered double-digit losses
Contrasting Investment Patterns Across Sectors
This technology sector exodus stands in stark contrast to overall foreign investor behavior in Indian markets. During the same fortnight, FIIs turned net buyers in equities worth Rs 19,675 crore following the announcement of an interim US-India trade deal, which also provided support to the rupee.
Capital flows have shown remarkable divergence across different sectors:
- Capital goods stocks attracted more than Rs 8,000 crore in inflows
- Financials saw buying worth Rs 6,175 crore
- Oil and gas, metals, power and construction sectors also recorded positive inflows
- FMCG and healthcare segments witnessed outflows of over Rs 1,000 crore each, though far smaller than the IT exodus
Analysts Divided on AI's Existential Threat to Indian IT
Nomura's Cautious Assessment
Global brokerage Nomura has suggested that fears of rapid displacement may be overstated, arguing that large enterprises are unlikely to replace complex technology ecosystems quickly. The firm believes concerns about AI disruption are oversimplifying the role of IT services companies.
"Enterprise buyers prioritize stability and risk reduction over experimentation," Nomura noted, adding that "it is easier said than done that a SaaS product and IT vendors can be replaced by AI-coded applications, given that enterprise IT buyers optimize for career risk—reducing risks of failures—and not costs and innovations necessarily."
Three Possible Scenarios for the Sector
Nomura outlined three distinct trajectories for India's IT services industry:
Pessimistic Scenario: Structural decline with revenue growth slowing to 2-3 percent or even contracting, valuation multiples falling to 10-12 times earnings as automation erodes routine work.
Middle Scenario: Companies successfully pivot toward data and AI-led services, allowing growth to recover to high single digits and valuations to stabilize in the early-20 multiples range.
Optimistic Scenario: IT firms evolve into AI orchestrators, shifting from billing for effort to delivering outcome-based services. Under this model, the addressable market could expand from about $1.5 trillion in traditional technology services to nearly $4.5 trillion linked to augmenting or replacing human enterprise labor.
Nomura observed that "the current sell-off in IT services stocks appears to be a case of front-loading of pains—pricing in extinction of old business models before gains from new business models emerge." The brokerage noted valuations have corrected below 12-year averages and now trade at a 12-39 percent discount to five-year averages.
Preferred Stock Picks and Industry Response
Despite the sector-wide concerns, Nomura identified specific opportunities:
- Large-cap picks: Infosys and Cognizant
- Mid-cap selection: Coforge
- Small-cap opportunity: eClerx
Industry players are actively positioning themselves to capture emerging AI opportunities. Major companies including TCS and Infosys have outlined comprehensive strategies to expand AI-led consulting, automation and transformation services.
Structural Advantages Remain
Brokerage Emkay Global emphasized that IT services firms retain significant structural advantages despite technological disruption. "IT Services companies have the advantage of contextual understanding of enterprises' complex environment, domain knowledge, and clients' trust; hence, they would remain relevant even in the AI era, in our view," the firm stated.
The massive capital reallocation away from India's technology sector represents one of the most significant investment shifts in recent years, reflecting deep-seated concerns about how artificial intelligence will reshape the global technology services landscape. As traditional business models face unprecedented challenges, the industry's ability to adapt and innovate will determine whether current valuations represent excessive pessimism or prudent caution.
