Indian IT services revenue is expected to grow at a mid-single-digit pace in 2026, marking a modest improvement over 2024-2025. Fitch notes that the global economic backdrop remains uncertain, with slower expansion in the US and eurozone, tariff-related cost pressures and persistent trade frictions. These factors will continue to restrain discretionary technology spending, keeping enterprise IT budgets under close scrutiny.
Despite these challenges, the sector’s deal pipeline remains strong. Large contracts focused on cost optimisation, vendor consolidation, legacy modernisation and AI-led efficiency are expected to support stable bookings. Growing enterprise adoption of AI and expanding AI ecosystems, including investments in compute infrastructure, should further reinforce demand and protect operating margins.
Wage inflation is likely to stay manageable in 2026. While headline inflation may trend higher, salary pressure will be concentrated in scarce digital skill sets. Overall wage bills will be cushioned by a rising offshore delivery mix, bench management and productivity gains from AI-driven tools. Quarterly margins may fluctuate due to annual wage revisions, but partial pass-through of higher costs should limit earnings volatility. Attrition levels have remained stable across the industry.
The new fee applicable to most H-1B petitions from September 2025 could raise onsite staffing or subcontracting costs. However, Fitch does not expect a material margin impact. Indian IT firms have significantly reduced their dependence on H-1B visas, expanded local hiring in the US and increased offshore delivery, enabling them to absorb or pass through higher costs. Larger diversified companies are particularly well positioned to adapt to immigration policy shifts.
Free cash flow generation is expected to remain robust. Fitch projects pre-dividend FCF margins of around 16 to 17 percent in 2026, supported by steady EBITDA margins and low requirements for working capital and capital expenditure. Prompt customer payments should keep receivable days low. With healthy liquidity, low leverage and net cash positions, most rated IT issuers are likely to maintain high shareholder returns through dividends and buybacks.
However, economic uncertainty continues to pose a meaningful risk. Tariff-related cost increases could pressure margins for US-based delivery, pushing firms to tighten costs, adjust geographic mix or diversify service portfolios. Given the sector’s high exposure to US clients, any tightening of budgets or policy shifts remains a key vulnerability.
AI-driven disruption also presents a structural challenge. Increased automation and in-housing may threaten the traditional low-cost outsourcing model. The industry’s shift from effort-based to outcome-based contracts may introduce revenue volatility, margin compression linked to performance risk and greater complexity in defining and pricing measurable outcomes.
Rajani Baburajan
