India's IT sector is experiencing a dramatic decline in its influence on the Nifty 50 benchmark, with the combined weight of five information technology companies falling to below 7.6% - the lowest level since at least 2002. According to data compiled by Bloomberg, this represents a significant shift from the sector's peak position more than two decades ago when it accounted for more than a fifth of the benchmark index. The retreat marks a fundamental change in leadership within India's ₹5 trillion stock market, reducing the sector's influence on benchmark returns as AI disruption fears and sector-wide selloff continue to erode market influence.
The IT sector's decline has been particularly pronounced this year, with the Nifty IT Index slumping 27% year-to-date as of June 2026, compared to a 9% decline in the broader Nifty 50 gauge. As reported by Mint, foreign portfolio investors have net sold equities worth ₹26,801 crore in the IT sector in the year so far up to May 31, 2026. In June, the IT index slipped to its lowest point in three years as the sell-off has continued. Investors are expressing concerns that generative AI could undermine the traditional outsourcing model that powered the industry's rise in the early 2000s, creating a significant performance gap between the IT sector and the broader market.
The sector's decline has resulted in a dramatic shift in individual company rankings within the Nifty 50. According to The Economic Times, Infosys Ltd. has slipped to eighth-largest stock by weight from third place five years ago, while Tata Consultancy Services Ltd. ranks 13th. Technology has now become the fifth-largest sector in the Nifty 50, trailing financials, consumer discretionary, energy and industrials. This represents a significant change from the sector's previous dominance in India's stock market hierarchy, with the shift in leadership becoming increasingly pronounced as AI disruption concerns mount.
Despite the sector's decline, several fund managers are viewing the IT sector as a contrarian investment opportunity. As reported by Mint, data from Value Research showed that actively managed diversified equity schemes had over ₹1.3 trillion riding on the IT sector as of May 31, 2026. Fund managers argue that stock prices have already absorbed much of the bad news, with several leading IT companies available at earnings yields of around 6-7%. Sailesh Raj Bhan from Nippon India Mutual Fund noted that a weaker rupee provides supportive tailwinds for earnings, as IT companies earn a large share of their revenue in dollars. The sector's track record as a high cash-generating, export-oriented business that has weathered multiple technology shifts over decades supports this contrarian view.
While some fund managers remain optimistic about the sector's prospects, others caution about the AI disruption risks. Rahul Singh from Tata Mutual Fund highlighted that the AI question still has too many unknowns, with potential revenue deflation in traditional coding services and AI-driven productivity gains creating uncertainty. JP Morgan warned that FY27 could be a year of muted growth with potential deceleration, as a soft start leaves a tougher ask for the rest of the year. The brokerage expects sentiment rather than earnings to set direction, with AI narrative of deflation likely to feel stronger without meaningful revenue growth acceleration. However, fund managers like George Heber Joseph from ASK Investment Managers believe large-cap IT companies are better positioned due to scale advantages and stronger balance sheets, making them attractive at current valuations of 15x-18x earnings on one-year forward basis.
