Geopolitical tensions, oil surge challenge IT recovery

Indian IT companies will kick off their earnings season from Friday. While fourth-quarter (Q4FY26) results for most firms are expected to be broadly in line with the third quarter, investors will be keenly watching management commentary on growth prospects for FY27.

There is little doubt that the past financial year was challenging for the global technology industry, with Indian IT companies feeling the impact.

The rapid rise of artificial intelligence (AI), along with new tools and plugins from generative AI leaders like Anthropic, OpenAI and others, added to the uncertainty. Although enterprise-scale adoption of many AI tools is still evolving, their emergence alone made investors nervous.

In addition, Indian IT firms faced another major pressure point during the year. US President Donald Trump imposed a 50 per cent punitive tariff on India. While services were not directly impacted, the move dented investor sentiment by raising uncertainty around a potential India–US trade deal.

Unsurprisingly, IT stocks witnessed a sharp correction during FY26, with many falling 30–50 per cent. The Nifty IT index underperformed for yet another year. Conditions began to improve slightly with progress on a trade deal with the US and easing fears of AI-led disruption, leading to a modest recovery in IT stocks.

However, fresh geopolitical tensions emerged toward the end of February with the Iran–US–Israel conflict. The resulting surge in crude oil prices has had a cascading effect across sectors. As we enter FY27, global stability remains a key concern for the Indian IT industry.

In just one month of conflict, global supply chains have been disrupted across several industries. Downstream sectors reliant on crude oil and its derivatives are beginning to show signs of stress, an important concern for the global IT outsourcing industry.

Oil lies at the heart of the global economy, and any disruption in its supply or pricing affects nearly all sectors. From oil and gas, manufacturing, and retail to banking, insurance and technology, multiple verticals within the IT industry have felt the impact over the past month.

Rising inflation is also beginning to strain consumer spending. However, there is a silver lining amid the volatility. The United States, one of the largest markets for Indian IT firms, is relatively less dependent on West Asian oil supplies, which could limit the impact on IT spending.

In contrast, Europe remains heavily dependent on oil supplies from West Asia. Given that Europe contributes roughly 30 per cent of revenue for most Indian IT firms, any slowdown in the region could pose a significant growth challenge.

Against this backdrop, the recent ceasefire announcement between the US and Iran offers some relief. However, its sustainability remains uncertain, making it difficult to form a clear outlook on the growth prospects of the Indian IT industry in FY27.