While Indian benchmark indices staged a strong comeback in March, breaking a five-month losing streak, the Nifty IT index remained under pressure for the third consecutive month. The index has now plunged 15% in Q1CY25, marking its worst quarterly decline in 10 quarters.

Despite the broader market recovery, IT stocks failed to rebound as global concerns over US economic growth, escalating trade tensions, and AI disruptions continue to weigh on the sector.

Infosys Leads IT Stocks Decline

Among the worst performers, Infosys emerged as the top laggard, tumbling 7% in March. Other major IT stocks also suffered:

• Wipro declined 5.6%,

• Tech Mahindra dropped 4.8%,

• LTI Mindtree fell 4.2%.

The Nifty IT index is now down 20% from its peak, signaling persistent investor concerns over the profitability and valuation of Indian IT firms.

US Trade Tensions and Economic Uncertainty Impacting IT Sector

Analysts believe the US economic outlook remains uncertain, particularly under the policies of President Donald Trump. Several key factors are driving investor caution:

• Fluctuating US tariff policies are impacting global trade. Trump is set to announce reciprocal tariffs on trading partners, including India, on April 2.

• The Federal Reserve's monetary policy remains uncertain, with investors reassessing expectations of multiple interest rate cuts in 2025.

• Rising US inflation and slowing GDP growth have created additional downside risks for Indian IT companies.

AI Disruptions Pose Long-Term Risks for IT Firms

Apart from trade tensions, analysts at Morgan Stanley and Citi Research have warned that:

• The rise of artificial intelligence (AI) and automation is expected to slow software growth, leading to lower client spending on IT services.

• Valuation multiples of Indian IT firms remain elevated despite recent corrections, making further downside possible.

• The US government’s cost-cutting measures, including job cuts at Accenture, signal reduced corporate spending, directly impacting the IT sector.

Nifty IT Index Sees Worst Quarterly Drop Since 2022

The Nifty IT index slipped another 1.16% in March, following a 12.53% decline in February and a 1.56% drop in January.
This 15% quarterly fall is the steepest since Q2CY22, when the index plunged 23.33%.

Goldman Sachs Raises US Recession Forecast

With Trump's expected reciprocal tariff announcement on April 2, global financial firms have raised concerns about the US economic outlook:

• Goldman Sachs has increased its US core inflation forecast for 2025 to 3.5%, exceeding the Federal Reserve’s 2% target.

• The firm expects tariff rates to rise by 15 percentage points, significantly impacting global trade.

• US unemployment is projected to rise to 4.5%, further straining corporate spending on IT services.

• Goldman Sachs now assigns a 35% probability of a US recession in the next 12 months, up from 20% in its previous forecast.

Stagflation Fears and IT Sector Outlook

Analysts warn that the risk of stagflation—a combination of low growth and high inflation—is increasing. The last time the US faced stagflation was in the 1970s and 1980s, when the Federal Reserve had to aggressively hike interest rates to curb inflation.

If history repeats itself, IT spending by US firms could decline further, adding more pressure on Indian IT stocks in the coming quarters.

Conclusion

Despite a broader stock market recovery, the Indian IT sector continues to struggle due to:

• US trade tensions and rising tariffs,

• Economic slowdown fears and inflation concerns,

• Artificial intelligence-driven disruptions in software spending.

With Infosys, Wipro, and Tech Mahindra leading the decline, analysts remain cautious on Indian IT stocks, predicting continued volatility in the near term. Investors will closely watch Trump’s tariff announcement on April 2, which could set the tone for the sector's performance in Q2CY25.

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