New Delhi: India’s IT services sector is likely to record sustainable growth of 4 to 5 per cent, slightly above the trendline of the past three years, according to a report released Friday.

HSBC Global Investment Research said analysts expect reduced macroeconomic volatility in the coming quarters and some recovery in growth in FY27. However, the sector is unlikely to see a turnaround in the second quarter of FY26, with demand remaining weak amid global uncertainty and the deflationary impact of artificial intelligence.

“These factors may not improve until FY27, in our view, as global headwinds provide a cushion to pricing pressure,” the report said, while maintaining a ‘buy’ rating on many IT stocks.

Growth in the second quarter is expected to remain in line with the first, driven mainly by vendor consolidation and cost-rationalisation deals, which HSBC described as a “zero-sum game.”

“The sustainable growth rate for the sector is unlikely to exceed 4-5 per cent, though over the past three years it has remained below this trend. While FY24 and FY25 were affected by share losses to global capability centres, FY26 has been hit by both AI deflation and macroeconomic uncertainty,” the report noted.

Although recent US corporate results have been strong, companies continue to hold back discretionary spending on new initiatives, it said.

Large-cap IT firms are expected to post sequential growth of 0-2 per cent in dollar terms, while mid-tier companies may range between a 1 per cent decline and growth of up to 5.5 per cent.

HSBC added that large-cap IT stocks can no longer be treated as five-year buy-and-hold compounding investments, and instead require active management through cycles and volatility.

IANS