Artificial intelligence is shifting from a growth driver to a structural challenge for India's information technology services industry, according to HSBC, which said the sector faces pressure regardless of whether global investment in AI continues or slows.
The brokerage said AI is making software engineering work more efficient, reducing the need for billable hours across services such as coding, testing, maintenance and migration. At the same time, it said any moderation in AI-related spending could also weigh on demand as companies cut discretionary technology budgets.
That leaves Indian IT companies exposed to both AI-led productivity gains and weaker client spending, HSBC said.
The view marks a departure from the widely held belief that Indian IT services companies would be among the main beneficiaries of the global AI investment cycle. Instead, HSBC said AI is accelerating pricing pressure on existing services without creating enough new work to offset the impact.
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HSBC Sees AI Driving Deflation In Core IT Services
HSBC said many software engineering tasks are deterministic and rely on unstructured data, making them well suited to AI-driven automation. As businesses adopt AI tools, companies can complete more work with fewer engineers, reducing demand for traditional outsourcing services.
"AI adoption in tech won't slow now," the brokerage said.
It added that AI is unlikely to create meaningful incremental demand for software engineering activities such as coding, maintenance, testing and migration. Instead, improvements in productivity are expected to increase pricing pressure on these services.
HSBC said this "deflationary impact" on the existing business of Indian IT companies is unlikely to reverse in the near term.
The brokerage estimates that about 15% to 20% of industry revenue already reflects pricing pressure linked to AI, while another 35% to 40% could incorporate similar deflation by FY27, with the remaining impact likely to follow in FY28.
AI Spending Slowdown May Not Help Indian IT
HSBC also challenged the view that a slowdown in global AI investment would benefit Indian IT companies by reviving traditional outsourcing demand.
"Any moderation in global AI investments and the AI narrative is not a positive read-across for Indian IT, in our view," the brokerage said.
It said lower returns from AI investments could lead companies to reduce discretionary spending, limiting new business opportunities for IT service providers. At the same time, productivity gains from AI would continue to weigh on pricing for existing contracts.
According to HSBC, infrastructure spending on AI is likely to remain intact because it is backed by measurable returns, but spending on AI applications in business functions could slow if companies fail to generate expected returns on investment.
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Growth Recovery Likely To Remain Gradual
HSBC said Indian IT companies could continue to report weak growth over the next two financial years as pricing pressure offsets gains from AI-related projects and legacy transformation work.
The brokerage expects industry growth to remain in the low single digits through FY27 before improving to the mid-single digits in FY29 after the current deflationary phase eases.
It added that the sector's valuations should find support once investors gain greater clarity that pricing pressure has peaked, estimating a fair valuation range of 12 to 13 times one-year forward price-to-earnings multiples.
HSBC also noted that the market has largely viewed Indian IT as a beneficiary of a softer global AI narrative. However, it said that assumption overlooks the structural changes AI is bringing to the industry's traditional services business, where higher productivity may permanently reduce demand for labour-intensive work.
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