Indian software stocks rally as global AI enthusiasm cools
India’s information-technology stocks are on course for their most significant weekly outperformance against global semiconductor rivals in two decades, signaling a potential shift in investor appetite away from the high-flying artificial intelligence (AI) trade. This dramatic reversal highlights growing concerns that the AI sector has become overvalued after a prolonged rally, making Indian software stocks an attractive alternative.
An index tracking India’s biggest software exporters surged 7.5% this week through Thursday. In stark contrast, the MSCI global chipmakers index tumbled 7.4% during the same period.
A market rotation in motion for Indian software stocks
This divergence sets up the Indian IT sector for its largest weekly gain over its AI-focused peers since 2004, as the AI boom gives way to worries about slowing revenue growth, infrastructure financing, and renewed fears of rate hikes.
The recent slump in AI-related stocks marks a sharp turn after a period of intense market enthusiasm. Investors who piled into chipmakers and other AI infrastructure companies are now reassessing their positions. Slowing revenue growth, combined with concerns over the financing for massive infrastructure projects and renewed fears of central bank rate hikes, have fueled this investor retreat.
This shift has created an opening for sectors that were previously overlooked.
Some analysts are dubbing the move into Indian IT an “anti-AI trade.” As foreign portfolio investors pull back from overstretched valuations in the global AI market, they are finding renewed appeal in the relatively low valuations and recent positive earnings from India’s tech giants.
The broader Indian tech scene has been a hotbed of activity, setting the stage for this renewed investor interest.
The numbers from mid-October are telling. On October 15, the Nifty IT index jumped about 2%, extending its gains over three sessions to roughly 8% and hitting its highest level in over a month. This rally was partly attributed to a global correction in AI stocks and renewed focus on foreign fund flows into Indian equities.
Behind the Indian IT resurgence
The rebound isn’t just a reaction to global trends; it’s also built on solid domestic performance. HCLTech posted an 8.4% single-day share price increase on October 13, its largest since 2020, after reporting better-than-expected earnings for the September quarter. Other major players like Tata Consultancy Services (TCS) and Infosys also saw their shares climb by around 3% each on October 15.
Seema Srivastava, a Senior Research Analyst at SMC Global Securities, suggests this trend reflects a “rising anti-AI trade” in emerging markets. As the AI bubble deflates, capital is flowing back into fundamentally sound but less hyped sectors.
The historical performance of the Nifty IT index, which fell more than 46% from its 2024 peak by mid-2026, had left it significantly undervalued compared to its global peers.
This valuation gap is a key part of the story. As of late September 2026, the Nifty IT index traded at a price-to-earnings ratio of about 17.3 times. This is substantially lower than its five-year median of 27.17, making it an attractive proposition for investors looking for growth at a reasonable price, especially when compared to the sky-high valuations of many AI-centric firms.
Navigating the AI disruption
While Indian IT firms are currently benefiting from the AI pullback, they are not immune to the disruptive power of the technology. Automation driven by artificial intelligence poses a long-term challenge to the traditional IT services model, which relies on large workforces and billable hours.
Analysts have warned that AI could cause an annual revenue deflation of 2% to 3% in traditional IT services over the next few years.
But India’s IT giants are not standing still. They are actively pivoting their business models, shifting from foundational AI research to becoming expert AI integrators. Instead of competing with the creators of large language models, they are focusing on high-margin services that help global corporations implement and optimize AI within their existing operations.
This strategy positions them as indispensable partners in the digital transformation journey, a trend impacting major financial institutions globally. The broader financial sector, including asset management firms, is also adapting to these technological shifts.
This “AI-First” approach is already bearing fruit. TCS reported annualized AI revenue exceeding $3 billion in its October 2026 quarterly results, which accounts for over 10% of its total revenue. The company has also heavily invested in upskilling its workforce, with over 100,000 employees now possessing advanced AI skills.
Similarly, Infosys has made 270,000 of its employees “AI-aware,” preparing its talent pool for the next wave of tech services.
Government support and the road ahead
The Indian government has also thrown its weight behind the sector’s AI ambitions. In March 2024, the government approved the IndiaAI Mission with a budget of ₹10,371.92 crore (approximately $1.24 billion) over five years. This initiative aims to build indigenous AI capabilities, improve data infrastructure, foster startups, and promote ethical AI development, creating a fertile ground for the tech industry to grow.
This support, combined with massive private investment, is transforming India’s digital landscape. The country’s technology industry revenue is estimated to hit $315 billion in FY 2026, with data center capacity projected to double by 2027. This robust ecosystem provides a strong foundation for Indian IT firms as they compete on the global stage.
However, analysts offer a note of caution. Alan Richardson, a portfolio manager at Samsung Asset Management, believes the recent surge is more a reaction to shifting global sentiment than a fundamental change in demand for IT services. These macroeconomic pressures, including renewed fears of interest rate hikes, continue to loom over corporate spending decisions worldwide.
Such global economic pressures can certainly influence investor sentiment. He argues that a sustained improvement in earnings will be necessary to bring foreign investors back to the Indian IT market consistently.
The path forward for Indian software companies depends on their ability to successfully transition from their traditional roles to becoming key players in the AI integration space. The current market rotation has given them a valuable opportunity. Whether they can capitalize on it for long-term growth remains the key question for investors.