Foreign portfolio investors (FPIs) sold a record $8.5 billion worth of Indian information technology stocks in 2025, marking the highest annual sell-off on record for the sector. This massive divestment highlights a sharp divergence between IT shares and the broader market, with foreign investors cutting exposure to technology even as benchmark indices posted gains.

Market Performance Divergence

The scale of selling created a stark contrast in performance metrics between the IT sector and broader market indices during 2025:

This IT sector selloff formed part of a broader $18.8 billion equity outflow by FPIs across all sectors in 2025, representing the highest annual outflow since NSDL and CDSL began compiling data in 2012.

Q3 FY26 Growth Outlook

Analyst expectations for the upcoming quarter remain cautious. Yes Securities anticipates that seasonal factors such as furloughs, combined with prevailing macro headwinds, are likely to keep sequential revenue growth muted for most IT players in Q3 FY26. However, the brokerage notes resilience in core segments despite the challenging environment.

Major IT Stock Declines

Losses in the IT index were led by significant declines across major technology companies:

H-1B Visa Concerns Drive Selloff

IT shares faced pressure from multiple factors, including concerns over a weaker earnings outlook and slower momentum in new deal wins. The sector experienced intensified pressure after the US administration under Trump adopted a tougher stance on H-1B visas, introducing a $100,000 fee on new visas. This development raised concerns given the sector's heavy reliance on overseas skilled workers.

The H-1B visa issue particularly impacted Indian IT companies, as firms such as TCS have been among the largest beneficiaries of these visas in recent years. The new restrictions raised worries over higher operational costs and workforce planning challenges.

Monthly FPI Activity in IT Stocks

FPIs demonstrated selective buying patterns throughout 2025, with net purchases occurring in only three months:

All other months recorded net selling activity in IT stocks.

Sector-wise FPI Flows

Beyond IT stocks, FPIs recorded significant outflows across multiple sectors during 2025:

However, some sectors attracted positive flows, with telecommunication shares leading inflows at $5.40 billion during the year. Miscellaneous stocks recorded $2.40 billion in net inflows, followed by oil and gas stocks at $939.00 million and service sector shares at $856.00 million.

IT stocks faced renewed selling pressure on Monday as traders built fresh bearish derivative positions ahead of the Q3 earnings season. The NSE IT index closed down 1.4%, with nine out of ten stocks declining between 0.4% and 2.2%. The sector-wide selloff was driven by cautious sentiment ahead of earnings and recent brokerage downgrades.

Stock Performance and Derivative Activity

LTIMindtree was the sole gainer in the IT pack, rising 0.13%, while the rest of the sector witnessed broad-based declines. Market analysts noted significant short buildup across major IT stocks, indicating trader pessimism ahead of quarterly results.

Heavyweights including TCS, Infosys, Wipro, HCL Technologies, and Tech Mahindra all added 3% to 6% of open interest as short buildup, while mid-cap IT stocks like LTIMindtree and KPIT Technologies saw around 10% addition in short positions.

Brokerage Downgrades Weigh on Sentiment

Recent brokerage actions contributed significantly to the negative sentiment. CLSA downgraded HCL Technologies and Tech Mahindra, while maintaining a cautious outlook on the sector's recovery prospects. The brokerage expects substantial upside for Persistent Systems, Coforge, and LTIMindtree due to stronger earnings growth, but remains selective on large-cap stocks.

Citi Research continues to expect a slow and uneven recovery for the sector, noting that valuations remain unattractive and recovery pace will be crucial.

Q3 Seasonality and Tariff Concerns

The third quarter is traditionally a softer period for IT companies due to several seasonal factors. Market participants cited fewer working days, seasonally higher furloughs, slower deal conversions, and delayed budget renewals by clients as key concerns for Q3 performance.

Additionally, fresh tariff concerns emerged after comments from US President Donald Trump regarding potential implementation of additional tariffs on India, raising worries about potential impact on the IT sector.

Mixed Performance Trends

Despite Monday's decline, IT stocks have shown contrasting performance across different timeframes. The sector has been underperforming over the past year but showed recovery in recent months as investors found value after the prolonged underperformance.

Analysts remain cautious about the near-term outlook, recommending exposure only for long-term investors while tracking management commentary and AI investment plans to assess the sector's future prospects.