Indian IT Stocks Rally as Foreign Funds Rotate From AI Trade
Indian IT stocks are posting their second consecutive day of sharp gains as foreign investors rotate capital out of the unwinding global artificial intelligence trade and into deeply discounted outsourcing majors.
Shares in India’s top outsourcing companies surged for a second day, led by mid-cap firms. Coforge climbed 5% following a strong first quarter, while Persistent Systems advanced more than 3%. Among the major indices, Infosys rallied 4.1% to Rs 1,152, TCS gained 3.2% to Rs 2,476, HCL Tech rose 2.3% to Rs 1,350, and Wipro edged up 2.2% to Rs 185.
The rally defies a broader regional selloff driven by an unwind in artificial intelligence valuations. MSCI's broadest index of Asia-Pacific shares outside Japan fell 1%, putting it on track for an 8% monthly loss, while Japan's Nikkei slipped 1% toward a 10% drop for July. “The AI trade is being viewed with a much greater degree of skepticism, and the shift in sentiment means it has become something of a one-way trade, with stocks being sold unmercifully,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
The rapid shift in sentiment is prompting foreign portfolio investors to reallocate capital toward Indian equities. According to a recent Jefferies report, discussions with over 50 FPI investors indicate a positive sentiment shift toward India as AI skepticism intensifies. The brokerage closed its longstanding underweight position on IT services, adding Infosys and increasing its weighting in Coforge to bring its overall IT allocation to neutral.
This tactical pivot is underpinned by severely depressed valuations following a prolonged sector slump. The Indian IT sector has fallen 25% year-to-date, leaving the top four majors trading 35% to 50% below their two-year peaks at price-to-earnings multiples of 13 to 17 times. Jefferies noted that milder negative stock reactions to adverse news suggest the sector is nearing a bottom despite expectations of low-to-mid single-digit revenue growth through fiscal 2028.
The brokerage funded these IT additions by trimming its largest overweight positions in power, real estate, and hospitals. Meanwhile, the sector's near-term trajectory remains tethered to US monetary policy and its impact on technology spending. The Federal Reserve is expected to hold rates steady today, but CME FedWatch data shows the probability of a 25-basis-point hike has risen to 36.3%, with markets pricing in an 81% chance of a hike by September.
Higher US interest rates typically constrain corporate technology budgets, directly impacting the outsourcing demand Indian firms rely on. However, a stronger resulting dollar can benefit Indian IT companies by increasing the rupee value of their overseas revenue. Investors will be watching the Federal Reserve's decision today for signals on that delicate balance.
