Indian IT Services Industry to See Moderate 4-6% Growth in FY26

The Indian IT services sector is projected to grow at a moderate rate of 4-6% in FY26, according to a report released by ICRA. The rating agency based its assessment on a sample of companies that contribute around 60% of the industry’s revenue.

Despite signs of gradual recovery over the past three quarters, the sector faces near-term challenges due to global economic headwinds and policy uncertainties in key markets like the US and Europe. Potential US trade tariffs and broader macroeconomic pressures are dampening growth, according to Deepak Jotwani, Vice President & Sector Head at ICRA.

Jotwani highlighted that US policy changes affecting key industries served by Indian IT firms, along with future interest rate fluctuations, will remain crucial factors influencing growth.

In the first nine months of FY25, Indian IT firms recorded a 3.6% year-on-year revenue growth in USD terms, signaling steady, albeit slow, recovery. Meanwhile, AI-driven transformation is reshaping the industry, with the number of fully AI-integrated companies globally rising from 9% in 2023 to 16% in 2024. India’s AI adoption rate also tripled during this period, though Generative AI (GenAI) adoption remains below 40%.

The BFSI (banking, financial services, and insurance), retail, and healthcare sectors have increased their discretionary IT spending, leading to new deal inflows for IT firms. Investments in GenAI technologies are beginning to translate into fresh business opportunities, particularly in AI-driven automation and analytics.

A sharp decline in attrition rates has been another notable industry trend. Attrition dropped to 12.8% in Q3FY25, down from 22.3% in Q3FY23. ICRA expects attrition to stabilize at 12-13% in the near term. Hiring activity, however, is likely to remain subdued until growth momentum picks up towards the end of FY26, as companies focus on cost efficiency and AI-driven productivity enhancements.

Stable Operating Margins Amid Cost Optimization

Despite revenue pressures, operating profit margins (OPM) are expected to remain steady at 22.5-23% over the next few quarters. This stability is attributed to cost-control measures, reduced wage hikes, and improved employee utilization. Employee costs, as a percentage of operating income, declined slightly to 56.2% in Q3FY25, down from 57% a year earlier.

While growth remains moderate, Indian IT firms are focusing on AI adoption, cost efficiency, and digital transformation to drive long-term sustainability. With strong deal pipelines and steady revenue visibility, the sector is poised to regain momentum as global economic conditions improve.