Indian IT services industry to see 4-6% revenue growth in FY26: Icra

IT sector growth is expected to remain subdued in the near term due to global economic headwinds and policy uncertainties in the US and Europe

India’s IT services industry is expected to witness moderate revenue growth of 4-6 per cent in financial year 2025-26 (FY26), according to a report released by Icra on Wednesday. The rating agency’s projections are based on a sample set of companies that account for approximately 60 per cent of the industry’s revenue.

 

While the sector has seen gradual recovery over the past three quarters, growth is expected to remain subdued in the near term due to global economic headwinds and policy uncertainties in key markets such as the US and Europe, Icra said.

 

Global trade dampening IT sector growth

According to Deepak Jotwani, vice-president & sector head at Icra, the uncertain global trade environment — particularly potential US trade tariffs — and macroeconomic pressures are dampening growth prospects.

 

“Policy changes by the US government for key sectors catered to by Indian IT services companies as well as future interest rate trajectory will remain the key monitorables,” Jotwani said.

 

BFSI, retail, healthcare see growth

The report did note that the industry is slowly recovering, with companies reporting a year-on-year revenue growth of 3.6 per cent in USD terms in the first nine months of FY25.

 

The banking, financial services, and insurance (BFSI) sector, along with retail and healthcare, has seen an uptick in discretionary IT spending, contributing to new order inflows. Additionally, investments in Generative AI (GenAI) technologies are beginning to translate into fresh business opportunities for Indian IT firms.

 

Indian IT firms have made significant investments in GenAI, training a large portion of their workforce in AI-driven capabilities. This has led to a rise in AI-related deals, particularly in BFSI and healthcare, which have been early adopters of AI-driven solutions.

 

Jotwani noted that while deal cycles have lengthened, overall contract wins remain strong, ensuring revenue visibility for the medium term.

 

Attrition rates in IT sector drop

One notable trend in the sector is the sharp decline in employee attrition rates, which had previously been a concern. Attrition levels dropped to 12.8 per cent in Q3FY25 from 22.3 per cent in Q3FY23. 

Icra expects attrition to stabilise at around 12-13 per cent in the near term.

 

Hiring activity is likely to remain subdued until growth momentum picks up towards the end of FY26, the report said. IT firms are prioritising cost efficiency and productivity through AI-driven solutions, reducing the need for large-scale recruitment.

 

Operating margins to remain steady

Despite revenue pressures, operating profit margins (OPM) are expected to remain stable at 22.5-23.0 per cent over the next three to four quarters. This is largely due to optimisation efforts, including moderation in wage hikes, higher employee utilisation, and cost control measures. Employee costs, as a percentage of operating income, dropped slightly to 56.2 per cent in Q3FY25 from 57.0 per cent a year earlier.