Hated till June, hottest in July! What’s driving the Rs 3.8 lakh crore boom in IT stocks?

Indian IT stocks have erased months of investor pessimism in a spectacular July reversal, adding Rs 3.82 lakh crore in market value as short sellers unwound bearish bets and investors questioned whether fears of AI-led disruption had pushed valuations too far.

Nifty IT index rallied 15.66% during the July expiry, turning one of the market’s most hated sectors through the first six months of the year into July’s best performer. Yet the rebound has come largely alongside falling futures open interest, raising a crucial question: is this the start of a lasting rerating or merely a tactical short-covering rally?



All 10 stocks in the index advanced during July, with seven gaining more than 15%. Persistent Systems led the rally with a 26% jump, followed by HCL Technologies at 25% and LTIMindtree at 24.6%. TCS climbed 20%, while Tech Mahindra, Coforge and Infosys advanced 16.9%, 16.67% and 15.35%, respectively.

TCS generated the biggest absolute wealth gain, adding nearly ₹1.48 lakh crore in market capitalisation during the month. HCL Tech added about ₹73,052 crore and Infosys ₹62,122 crore. Together, the three companies accounted for nearly three-fourths of the sector’s ₹3.82 lakh crore market-value increase.

The immediate trigger appears to have been short covering rather than a decisive return of fresh bullish positions. Aggregate futures open interest across the IT sector declined 22% during the recovery, according to YES Securities, indicating that traders were closing bearish positions as prices moved higher.

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The pattern was visible across the largest IT stocks. During the July expiry, HCL Tech rose 23% as open interest declined 35.9%, while TCS gained 18% alongside a 29.5% contraction in open interest. LTM advanced 21.8% as open interest fell 26.8%. Infosys, Tech Mahindra and Wipro also recorded price gains accompanied by substantial declines in outstanding futures positions.

YES Securities said the ongoing recovery appeared tactical, although HCL Tech and Mphasis stood out as its preferred relative outperformers within the sector.

The rebound has also coincided with a decline in global chip stocks as investors reassess the AI trade. India, with its relatively limited exposure to AI-hardware companies, is increasingly being viewed as an “anti-AI trade”—a rotation that has helped revive interest in domestic IT services stocks after months of underperformance.

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Jefferies said its interactions with more than 50 foreign portfolio investors indicated a positive shift in sentiment towards India as the AI trade came into question. The brokerage raised IT services to neutral from underweight, adding Infosys and increasing Coforge’s weight in its model portfolio.

“As the AI trade pauses, we tactically close out our longstanding IT services underweight by adding Infosys,” Jefferies said. The brokerage also increased Coforge’s weight in its model portfolio.

While revenue growth is expected to remain in the low-to-mid single digits over FY26 to FY28, Jefferies said a reversal in the AI trade could generate tactical upside after the steep decline. It also pointed to a softer share-price reaction to negative industry news as an indication that the sector may have formed a tactical bottom.

Nevil Dedhia, managing director and head of institutional equities at Equirus Securities, said the rally represented a change in investor preference rather than a broad technology recovery.

“The sharp rally in Indian IT stocks reflects a shift in investor preference rather than a broad-based technology rebound,” Dedhia said. Investors are rotating towards IT services companies following the correction in global AI infrastructure providers, attracted by cheaper valuations and free-cash-flow yields above 5% for most large-cap names, he said.

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Concerns about the rising cost of deploying frontier AI models and the pace of infrastructure investment are prompting investors to reassess pure-play AI infrastructure businesses. As companies demand clearer returns from their AI spending, expenditure could increasingly shift towards implementation and modernisation projects.

The adoption of open-source models and small language models alongside frontier models is also making enterprise technology systems more complex. That could increase demand for systems integrators and IT services companies capable of integrating, optimising and scaling AI across businesses, Dedhia said.

Yet the earnings picture has not improved enough to validate the full scale of the rally.

Sonam Srivastava, founder and chief executive officer of Wright Research, said the sharp move was driven by short-covering and optimism that Indian software exporters would play a bigger role in enterprise AI. Actual results, however, remained more muted.

The rupee could provide a margin tailwind of 150 to 200 basis points, an advantage Srivastava said the market was not fully appreciating. However, she recommended gradually building positions over the next two quarters in only those industry leaders that are converting AI opportunities into deals.

“It’s too early to go overweight the whole sector, but also too late to have zero exposure,” she said.

Rohan Korde, fund manager at Baroda BNP Paribas Mutual Fund, said the earlier correction was driven by tariff uncertainty and fears surrounding AI dominance, while growth guidance for FY27 remained weak. The sector, however, stands to benefit from a weaker domestic currency.

The next opportunity could emerge as companies move from AI pilots to scaled enterprise deployments, potentially generating demand for data engineering, cybersecurity frameworks, cloud integration and architecture. AI-related spending could also create opportunities in specialised semiconductors, edge-AI devices and data-centre infrastructure, Korde said.

Still, market participants remain wary of chasing the rally after the sector moved from deeply oversold to fairly valued within a single expiry. Without a broad-based expansion in open interest, technical analysts see an elevated risk of a reversal in August.

Rajesh Palviya, head of research at Axis Direct, described IT as a selective, long-term contrarian opportunity rather than an immediate broad-based buy. Structural concerns about AI-led disruption continue to weigh on the medium-term outlook, even as compressed valuations provide a degree of protection.

“Our advice to clients: avoid chasing tactical momentum and instead use bouts of localized volatility to accumulate high-quality, well-capitalised businesses through a disciplined, bottom-up approach over a 12–18-month horizon,” Palviya said.

The ₹3.82 lakh crore rebound has decisively changed the market’s near-term positioning on IT. Whether it lasts will depend on whether short covering gives way to fresh institutional buying and whether AI shifts from being the sector’s biggest perceived threat to its next source of revenue growth.

(Data: Ritesh Presswala)