5 Reasons Why India’s IT Sector is Losing its “Darling Status”

For decades, India’s Information Technology (IT) sector was the destination for Foreign Portfolio Investment (FPI). Its growing cash-rich software giants routinely attract international capital. However, a major change in finance has disrupted this status.

Driven by the rise of artificial intelligence (AI), global fund managers are moving capital away from software outsourcing and toward hardware-focused semiconductor nations like Taiwan and South Korea. This shift has pulled down the Foreign Institutional Investor (FII) allocation in tech to a record low of 7.3%, causing a sharp correction in the benchmark index.

There are five reasons why India’s IT sector is losing its status as an FPI favorite to semiconductor hubs.

1. The Global Rush for AI Hardware over Software

The early stages of the AI boom need raw computing power. Global investors are focusing on infrastructure. Like microchips, graphics processing units (GPUs), and advanced fabrication facilities. Over software implementation. As a result, trillions of dollars are flowing into semiconductor giants like Taiwan Semiconductor Manufacturing Co. (TSMC) and SK Hynix. This hardware focus reduces capital for Indian software exporters.

2. The Threat of “AI Deflation.”

The billing model of Indian IT relies on human hours spent on coding, testing, and maintenance. AI automation brings price deflation. Because AI tools allow developers to complete tasks faster, the total number of billable hours drops. Tech firms must pass these cost efficiencies down to clients, which shrinks contract values, squeezes margins, and scares investors.

3. Client Spending Changes and Lower Discretionary Budgets

Corporate clients worldwide are focused on optimization. In executing large-scale traditional digital transformation contracts with third-party vendors, global firms are cutting discretionary tech spending. They are saving capital to invest in proprietary AI models or internal engineering, causing revenue growth for major Indian IT firms to drop to low single digits.

4. Expansion of Global Capability Centers (GCCs)

The rise of AI has led corporations to change their outsourcing strategies. Rather than hiring Indian IT companies, global corporations are setting up their own Global Capability Centers (GCCs) inside India. Bypassing third-party IT vendors allows these companies to hire talent directly to build proprietary AI tools, effectively taking clients away from established IT exporters.

5. Valuation Premium Gap

Indian IT stocks have traditionally traded at valuation premiums compared to their emerging-market peers. With growth slowing down, fund managers find it hard to justify these high multiples. The sector’s slowing momentum has prompted large-scale selling, resulting in a decline of over 20% for the Nifty IT index in 2026 as capital moves toward cheaper or faster-growing tech alternatives abroad.

Conclusion

The sudden shift in FPI sentiment highlights a change in global technology investing. While India’s software firms are not obsolete, their capital-heavy business model is facing a valuation reset. To regain its status, India’s tech ecosystem must shift from low-cost coding labor to high-value AI integration while also speeding up domestic semiconductor initiatives like the India Semiconductor Mission.

Frequently Asked Questions

Why is the Indian IT sector losing favor among Foreign Portfolio Investors (FPIs)?

The Indian IT sector is facing reduced FPI interest as global investors shift capital toward semiconductor and AI hardware companies, which are expected to benefit more directly from the AI-driven technology boom.

How is artificial intelligence impacting the growth of the IT sector?

Artificial intelligence is transforming the IT sector by automating routine coding, testing, and maintenance tasks. While this improves efficiency, it can also reduce billable hours and pressure the traditional revenue model of many IT service companies.

Can the Indian IT sector regain its position as a top investment destination?

Yes, the Indian IT sector can regain investor confidence by expanding into AI integration, cloud services, cybersecurity, and other high-value digital solutions while supporting domestic semiconductor and technology innovation initiatives.

Statutory Citations & References

“Nationwide Momentum in Chip Design as India Prepares Workforce for AI Age: Shri Ashwini Vaishnaw,” Pib.gov.in, 2026. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2230976&reg=3&lang=2
C. Kumar, “FII allocation in technology hits all-time low of 7.3% in Q1 CY26; DIIs hold firm at 8%,” Fortune India, May 06, 2026. https://www.fortuneindia.com/markets/fii-allocation-in-technology-hits-all-time-low-of-73-in-q1-cy26-diis-hold-firm-at-8/136174
A. Mandal, “AI fears, heady valuations: Why foreign investors are selling off Indian IT stocks,” The Indian Express, May 07, 2026. https://indianexpress.com/article/explained/explained-economics/ai-deflation-indian-it-fii-selling-stocks-10676585/

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