- Foreign portfolio investors sold IT shares worth Rs 169.49 billion during the month.
- The selling coincided with a sharp correction in the Nifty IT index, which dropped about 19.5% in February.
- India's IT sector is going through a broader valuation reset.
Foreign investors have sharply reduced exposure to India's information technology stocks in February, triggering the sector's steepest fall in nearly two decades as concerns around artificial intelligence (AI) disruption and global macro risks unsettled markets.
Data from the National Securities Depository, accessed by Reuters, showed that foreign portfolio investors (FPIs) sold IT shares worth Rs 169.49 billion during the month, the highest outflow from the sector in seven months.
The selling coincided with a sharp correction in the Nifty IT index, which dropped about 19.5% in February, marking its worst monthly performance since September 2008, when the global financial crisis shook equity markets. The ten companies in the index together lost roughly $62.8 billion in market capitalisation during the month. FOLLOW LIVE UPDATES
AI disruption fears dominate market sentiment
The selloff gained momentum after several global technology firms announced new developments in AI automation, intensifying concerns that rapid advances in AI could reshape the traditional outsourcing model that underpins India's IT services industry.
In particular, updates from US-based AI companies such as Anthropic and Palantir sparked debate over whether software workflows, long handled by teams of engineers, could increasingly be automated by advanced AI systems.
Investors worry that such changes could compress margins for Indian IT firms whose business models historically relied on labour arbitrage -- deploying large teams of engineers to deliver services at competitive costs.
According to analysts, the shift toward AI could gradually replace that model with what some describe as "technology arbitrage", where automation rather than manpower becomes the key cost advantage. As AI is shortening project timelines and automating routine tasks, the traditional outsourcing model that depends on billing based on headcount may come under pressure. Globally, clients are also beginning to experiment with outcome-based pricing rather than paying for manpower hours, a shift that could further affect profitability.
Market unconvinced despite AI partnerships
The market correction comes despite a series of high-profile partnerships announced between global AI companies and Indian IT firms aimed at accelerating enterprise adoption of artificial intelligence.
Recently, India's largest IT services exporter Tata Consultancy Services announced a collaboration with OpenAI, while Infosys partnered with Anthropic to develop AI-led enterprise solutions.
While industry executives have described AI as an opportunity rather than a threat, the market appears unconvinced that this transition will be smooth.
Brokerage firm Jefferies recently cut price targets on several large IT companies by as much as 33% and warned that artificial intelligence could disrupt the managed services business -- a segment that contributes between 22% and 45% of revenues for major IT firms.
Managed services involve handling the day-to-day IT operations of enterprises and have historically provided stable, long-term revenue streams. If AI reduces the need for such services, the sector could become more cyclical.
US macro signals add to pressure
The recent selloff was not driven by AI concerns alone. Stronger-than-expected US labour market data also weighed on technology stocks globally by reducing expectations that the US Federal Reserve will cut interest rates in the near term.
Higher interest rates typically dampen appetite for growth and technology stocks, whose valuations depend heavily on future earnings expectations. For Indian IT companies, the impact is particularly significant because a large share of their revenue comes from US clients. If borrowing costs remain elevated and economic conditions tighten, corporate technology spending could slow.
Global tech stocks have already shown signs of weakness. The tech-heavy Nasdaq Composite fell about 2% in a recent session, reflecting a broader reassessment of the AI-driven rally that powered markets last year.
Foreign investors rotate into other sectors
Interestingly, the outflow from IT stocks did not translate into a broader retreat from Indian equities. FPIs remained net buyers overall in February, investing Rs 226.15 billion in Indian shares, the highest monthly inflow in about 17 months.
The flows largely shifted toward sectors such as capital goods, financials, metals and energy, where earnings outlook has improved. Foreign investor sentiment toward India has also been supported by easing trade tensions after the country concluded a trade deal with the European Union and reached an interim framework for an agreement with the United States.
Still, analysts caution that the recovery in foreign inflows remains fragile. Escalating geopolitical tensions due to the ongoing Iran war has already triggered fresh selling in early March, with FPIs offloading shares worth Rs 175.7 billion in just four trading sessions as rising oil prices dampened global risk appetite.
Valuation reset underway
Beyond near-term triggers, fund managers say the sector is going through a broader valuation reset. Indian IT companies collectively account for more than one-third of global IT services brand value and export technology services worth over $220 billion annually. Yet growth expectations have moderated in recent years as global technology spending slowed.
Some fund managers say the global IT services industry is currently expanding at just 3-5%, making it harder for Indian firms to maintain their earlier pace of market share gains. The uncertainty around artificial intelligence has further complicated long-term growth assumptions.
According to market participants, long-term growth assumptions for large Indian IT companies have already been revised downward, contributing to the recent correction.
Despite the sharp selloff, some analysts argue that fears around AI replacing IT services firms may be exaggerated. While AI tools can generate code, fix bugs and automate certain workflows, large global corporations still operate on complex and highly customised technology systems that require human oversight and domain expertise.
Hence, many experts argue AI will primarily function as a productivity tool, enabling engineers to work faster rather than replacing them entirely. There is also a possibility that AI could ultimately expand the market for technology services by making software development cheaper and more accessible, encouraging more companies to invest in digital transformation.
For now, however, investors remain cautious.
