New Delhi [India], February 27 : Rising trade tensions and economic uncertainties are adding new challenges for the IT services sector as tariffs and counter-tariffs have increased market instability, while inflation concerns and delays in interest rate cuts have worsened the outlook, according to a report by JM Financial.
"Tariffs and counter-tariffs have infused more uncertainty. Inflation and rate cut trajectories have worsened" said the report.
The report adds recent interactions with IT service providers have revealed mixed signals, with some reporting pauses in large programs by US banks. If this trend expands, it could have a significant impact on the sector's growth prospects.
"Our recent interactions with IT Services players gave us mixed signals. Few are maintaining their 3Q view still, especially on BFS. We also picked up instances of pause in large programs by US banks. That, if expands, does not bode well." said the report
Amid these uncertainties, the Indian IT services sector faces a mixed outlook. Global uncertainties, trade tensions, and inflation concerns weigh on market sentiment.
While large-cap IT firms are expected to grow steadily in FY26--with quarter-on-quarter revenue increases of 1.9 per cent to 3.3 per cent in the first half--the industry is grappling with multiple headwinds.
However, a slowdown in discretionary spending, particularly in the Banking and Financial Services (BFS) sector, has raised concerns about future revenue growth.
The Q3FY25 earnings of IT firms largely met expectations, with only a few companies outperforming due to better margin management.
Economic uncertainties--including trade wars, inflation, and delays in U.S. Federal Reserve rate cuts--have increased risks for the sector.
Despite strong deal wins, market sentiment has been affected by these global challenges, especially as major IT clients enter their annual budgeting cycles.
Large-cap IT firms reported quarter-on-quarter revenue growth of 0 per cent to 3.8 per cent in constant currency terms, while mid-cap players continued to outperform.
The Automotive Engineering Research & Development (ER&D) segment also experienced a slowdown, though the impact was less severe than expected.
Initially, IT companies were cautiously optimistic, citing improvements in short-duration deals and continued BFS sector spending.
However, recent geopolitical and macroeconomic developments, including rising trade tariffs and inflationary pressures, have introduced fresh uncertainties.
Analysts recommend a selective investment approach, focusing on companies with strong earnings resilience and valuation buffers to navigate these challenging conditions.