Indian IT services sector to see 4-6% revenue growth in FY26: ICRA

Uncertainty in global markets due to US trade tariffs and macroeconomic headwinds across geographies such as the US and Europe is expected to weigh on the growth of the Indian IT services sector. The industry is projected to clock moderate revenue growth of 4-6 per cent in US dollar terms for FY26, according to an ICRA report.

The projected 4-6 per cent growth is slightly better than the 3-5 per cent growth estimated for FY25.

“ICRA projects its sample set of Indian IT services companies, which account for approximately 60 per cent of the industry’s revenue, to witness a moderate 4-6 per cent revenue expansion in US dollar terms in FY26. Further, ICRA anticipates attrition levels to stabilise around the long-term average of 12-13 per cent over the near term,” the report stated.

Hiring is likely to remain low until growth momentum picks up by the end of FY26. The operating profit margins (OPM) for the sample set are expected to sustain at 22.5-23 per cent over the next three to four quarters.

Deepak Jotwani, vice president and sector head at ICRA, said: “ICRA projects a moderate 4-6 per cent revenue expansion in US dollar terms in FY26, following the 4-5 per cent increase estimated for FY25. Policy changes by the US government for key sectors catered to by Indian IT services companies, as well as the future interest rate trajectory, will remain key monitorables.”

The sample set recorded a year-on-year revenue growth of 3.6 per cent in US dollar terms in the first nine months of FY25, showing gradual recovery over the past three quarters. This was supported by a relatively lower base in FY24, a slight uptick in discretionary spending by customers in the banking, financial services, and insurance (BFSI) and retail sectors in some markets, and investments in generative artificial intelligence (GenAI) initiatives translating into new order inflows.

ICRA highlighted that easing attrition rates and wage cost inflation, which had been concerns in FY23 and the first half of FY24, have provided some respite for industry players.

The last 12 months’ (LTM) attrition for the sample set companies fell sharply to 12.8 per cent in Q3 FY25 from 22.3 per cent in Q3 FY23, as the overall slowdown in growth momentum and strong hiring in the previous fiscal addressed the demand-supply mismatch seen earlier.

ICRA expects attrition levels to stabilise at a long-term average of 12-13 per cent in the near term.

Additionally, employee costs as a percentage of operating income (OI) declined marginally to 56.2 per cent in Q3 FY25 from 57.0 per cent in Q3 FY24 due to moderation in wage hikes in the current fiscal. This, coupled with increased employee utilisation and cost structure optimisation, supported the OPM for the sample set at 22.5-23 per cent in recent quarters, a level expected to sustain over FY26.

ICRA anticipates that hiring will remain low in the near term until growth momentum strengthens by the end of FY26. Lower hiring activity is also linked to increased industry investment in GenAI, which is expected to enhance productivity and reduce costs.

Leading Indian IT services firms have trained a sizable portion of their workforce in GenAI skills and have started ramping up their capabilities and service offerings to deliver GenAI-based solutions to clients.

“This has started to show results, as the inflow of GenAI-related deals for major industry players has increased in recent quarters and is expected to pick up materially over the medium term as technology adoption becomes more pervasive. The healthcare and BFSI sectors remain early adopters of AI/GenAI capabilities and continue to invest in these technologies,” Jotwani added.

While near-term revenue pressures persist and deal cycles have elongated, overall deal wins for the industry in recent quarters have remained resilient. Industry participants continue to hold a healthy total contract value, providing revenue visibility over the near to medium term.