As India’s information technology sector is grappling with a post-pandemic recalibration, a fresh external headwind is adding to the turbulence: former US President Donald Trump’s renewed tariff strategy. While these tariffs don’t directly target IT services—India’s crown jewel in the export basket—they could still cast a long shadow on the sector’s growth trajectory by undermining client confidence and compressing budgets in its largest market: the United States.

The IT sector has also come under significant pressure as foreign portfolio investors (FPIs) offloaded ₹27,945 crore ($3.2 billion) worth of IT stocks in the first half of April—the third consecutive fortnight of net selling. This marks one of the sharpest sectoral outflows, driven by a mix of global macro headwinds, Trump’s tariff threats, and valuation concerns. Analysts highlight that the IT sector, being deeply tied to the U.S. economy, is vulnerable to any reduction in discretionary corporate spending. Policy uncertainty around H1B visas, a weakening dollar, and rising layoffs in the U.S. have only worsened sentiment.

Despite near-term weakness, experts suggest the sector could benefit from future reallocation, especially if India continues to deliver steady macro growth and valuations turn more attractive. For now, however, IT remains in the crosshairs of cautious global investors.

Collateral Damage: Indirect Impact of Tariffs on IT Services

India’s dependence on the US for IT revenues is well-documented. In FY2024, US-based clients contributed around 57% of the $193 billion revenue pool earned by Indian IT services providers. The heavyweights — Infosys, TCS, HCL Technologies, and Tech Mahindra — are not just household names in India, but deeply embedded in American enterprise systems.

However, this reliance is proving to be a double-edged sword. Following news of Trump's tariff policies, the Nifty IT index saw a sharp drop of 3.58% in a single day, reflecting investor jitters. Individual companies bore the brunt: Coforge fell 6.74%, Mphasis 5.90%, LTIMindtree 4.31%, Wipro 3.67%, and others followed suit. The most vulnerable are companies with the highest exposure to US clients. Mphasis, for instance, garners 82% of its revenue from the US, while Persistent Systems and LTIMindtree derive 81% and 75%, respectively.

Tariffs are traditionally seen as tools to protect domestic industries, but their ripple effects often reach unintended sectors. That’s precisely the concern analysts are flagging for India’s IT industry. The latest wave of protectionist measures under Trump’s policy resurgence may not apply to software or technology services, but the wider economic impact—particularly inflationary pressure and reduced discretionary corporate spending—poses an indirect threat. The resulting economic sluggishness in the US could increase inflationary pressures and lead to tighter client budgets. The potential economic deceleration in the US, prompted by these tariffs, may lead companies to prioritize core operations and delay or downscale digital transformation initiatives, impacting large-scale outsourcing deals—traditionally a growth engine for Indian IT majors.

BFSI Headwinds and Slowing Innovation Spend

A significant chunk of the IT sector’s fortunes hinge on one vertical: BFSI, which contributes nearly 30% to the overall revenue and more than 60% of total U.S.-derived revenue for top-tier IT companies, per CRISIL Ratings. In 1QFY25, BFSI revenue continued to deliver stable growth for both Tier-I and Tier-II IT firms. TCS, in its latest commentary, emphasized a “resilient demand environment” across U.S. financial institutions, citing ongoing deals around tech modernization and vendor consolidation.

However, the sector's dependence on BFSI becomes a critical vulnerability when recession fears and interest rate volatility grip financial institutions. US based BFSI clients will face tariff pressures adding to a financial strain which will lead to contract renegotiations, pricing pressure, and budget cuts.

Resilient Tech Budgets Amid a Cautious Macro Outlook

Earnings reports from giants like J.P. Morgan Chase, Morgan Stanley, Wells Fargo, Citibank, and Bank of America painted a picture of a complex macroeconomic environment, characterized by inflationary pressure, geopolitical tensions, and uncertainty around tariff policies. Despite this, banks have not retreated from their technology investments. On the contrary, most have reaffirmed their full-year tech expense guidance, signaling that modernization and digital transformation remain central to their strategic roadmaps.

For example, J.P. Morgan Chase maintained its 2025 expense guidance of $95 billion, explicitly supporting growth across technology and digital initiatives. Similarly, Citibank and Wells Fargo have sustained their technology investment levels, focusing on modernization, automation, and customer experience. Goldman Sachs is progressing with a multi-year transformation agenda powered by AI and engineering optimization, while Bank of America continues to scale digital platforms.

Strategic Priorities: AI, Automation, and Modernization

Across the board, US banks are betting heavily on next-gen technologies, particularly artificial intelligence, automation, and platform modernization. These efforts are not merely about cost efficiency; they aim to build competitive advantage, improve client engagement, and simplify sprawling legacy infrastructure.

• Morgan Stanley is integrating AI to enhance productivity and advisory platforms.

• Goldman Sachs is streamlining engineering operations using machine learning.

• Citibank is piloting generative AI tools like "Agent Assist" for credit servicing.

• Bank of America continues leveraging AI in both retail and commercial banking.

These strategic investments bode well for Indian IT companies that are already embedded in many of these transformation programs. Firms like TCS, Infosys, and HCL Technologies—long-time partners of global BFSI clients — are expected to benefit from ongoing spend on modernization, compliance, and cost optimization.

Q4 FY25 Earnings Performance of Major Indian IT Firms

The recent market correction could be overdone and there could be more upside than downside in the IT sector. Despite concerns over a potential U.S. slowdown and weak sentiment, Indian IT stocks are trading at a 5% discount to their five-year average. There are expectations of a near-term rebound, supported by improving valuations and signs of stabilization, especially after US President Donald Trump softened his tariff stance, and with India & USA approaching a trade agreement. Positive drivers include potential Fed rate cuts, corporate tax relief, ongoing cloud migration, and cost optimization efforts, with only minor disruptions in client spending projected.

The growing economic uncertainty is not just a topline concern. Rising operational costs in the US—a knock-on effect of tariffs—could shrink margins for Indian firms operating in that geography. Faced with margin compression and softening demand, Indian IT companies may be forced to recalibrate their strategies—tightening cost structures, exploring newer geographies, and diversifying their portfolio of services beyond traditional outsourcing. his shift is especially urgent given the weak momentum in winning large transformation deals. Post-COVID digital acceleration has plateaued, and enterprises are now more cautious about long-term commitments.

Infosys Earnings Performance For Q4 FY25

Infosys reported soft results for Q4FY25, with revenue decreasing by -3.5% QoQ and growing by +4.8% YoY. This was significantly below estimates. However, the EBIT margin at 21% QoQ was better than expected. For FY25, Infosys posted revenue growth of +4.2% YoY with EBIT margins of 21.1% (+40bp YoY).

Management's Outlook:

The management has provided FY26 revenue growth guidance of 0–3% and margin guidance of 20–22%. They expressed confidence in trying to mitigate the weak macro environment. While macro uncertainty has increased, the company has not yet seen any change in deal execution timelines. They anticipate the demand environment to remain challenging for the next 1-2 quarters due to macro uncertainty. However, they remain positive on the sector in the medium-to-long term due to high enterprise technology debt. Management sees growing demand from clients to partner on AI, deploying Topaz and AI-powered services.

They have factored in a deterioration in the demand environment in the lower end of their guidance and a slight improvement in the top end. Management also expects the third-party contribution in FY26 to be lower than in FY25.

TCS Earnings Performance For Q4 FY25

TCS reported muted results for Q4FY25, with revenue at $7,465 mn, showing a CC growth of +2.5% YoY, which was inline with expectations. However, the EBIT margin declined to 24.2% (-30bps QoQ, -180bps YoY), the lowest Q4 margin in 16 years, and was below expectations. Profit after tax (PAT) was also lower than estimates at Rs 122.24bn (-1.3% QoQ, -1.7% YoY). For FY25, international business growth was 0.5% YoY.

Management's Outlook

Management commentary reflected a cautious outlook on demand due to rising macro uncertainty leading to delays in client decision-making, particularly around discretionary spending. Verticals like Retail, CPG, Travel & Hospitality, and Manufacturing are likely to be impacted by tariff-related uncertainties in the US, and Auto is seeing cuts in discretionary spending. The BFS vertical outlook is relatively stable. TCS has deferred its wage hike cycle from April to June due to the uncertain environment.

Management expects stronger FY26 compared to FY25 for international business, stemming from a healthy order book and customer conversations. Budgets are generally flat, with cost optimisation funding transformation initiatives. Q1FY26 is expected to have more uncertainty than Q1 of the previous year. Management sees AI for business as a net new opportunity.

Wipro Earnings Performance For Q4 FY25

Wipro reported inline revenue and margins for Q4FY25. IT Services revenue was $2596.5mn, with a CC growth of -0.8% QoQ and -1.2% YoY, in line with expectations. IT Services EBIT margins were flat QoQ at 17.5%. The company reported a strong large deal TCV of $1.8bn (+46% YoY).

Management's Outlook

The company provided a weak revenue growth guidance of -3.5% to -1.5% QoQ in CC for Q1FY26, signalling poor TCV-to-revenue conversion and disappointing the market. Management cited continued client caution in tech spending amid heightened macroeconomic uncertainty, leading to project pauses, ramp-downs, and delays in client decision-making. Verticals such as Manufacturing and Consumer are disproportionately affected by tariff-related concerns, with indirect impacts on BFSI, Hi-Tech, and Healthcare. Europe is facing client-specific challenges in BFSI. The lower end of the guidance reflects further deterioration in the macro environment, while the upper end assumes modest demand recovery. Management aims to keep margins in a narrow band, but Q1FY26 will face margin pressures from weak revenue growth and pricing pressure. They will continue to invest in Sales & Marketing to prioritise growth.

Outlook: Slower Growth Ahead

While BFSI maintains its course for tech spending, the outlook for other industry verticals is less encouraging. Verticals like Retail & Consumer, Manufacturing, and Hi-Tech & Software are showing early signs of hesitation. Delayed decision-making and project deferrals in these sectors are likely to spill into 1QFY26E, as clients weigh the impact of policy changes, slowing global growth, and trade realignments. Analysts warn that if this softness persists, consensus estimates for Indian IT sector revenues in FY26 and FY27 may face downward revisions of 7–10%.

Indian IT stocks are no longer overvalued, but not deeply undervalued either. With FY26 expected to be another muted year, valuations hinge on FY27 recovery assumptions. For now, the sector appears to be in a valuation consolidation phase, pricing in near-term demand pressures while awaiting macro clarity and deal momentum to turn the corner. Current valuations, especially larger IT companies are below long-term averages, could offer an entry opportunity for long-term investors if macro risks stabilize.

CRISIL forecasts a modest 6–8% growth for the Indian IT sector in FY2026, continuing a trend of mid-single-digit expansion for the third consecutive year. For a sector that has historically delivered double-digit growth and served as India’s global tech ambassador, this moderation is a reality check. The once-robust pipeline of mega deals now appears fragile, with client hesitancy replacing digital exuberance. The Trump tariffs, though tangential in their immediate relevance to IT services, threaten to become yet another variable in an increasingly volatile operating environment.