The Indian IT sector is navigating a period of intense volatility as of late February 2026. While broader indices like the Nifty 50 have shown resilience, the Nifty IT index has faced a significant correction, dropping approximately **16%** over the past month. This downturn has pushed the index nearly **30%** below its all-time highs recorded in late 2024. Market sentiment is currently dominated by bearish positioning. Traders have significantly increased short bets, evidenced by a surge in open interest in IT stock futures. This trend is largely driven by fears that rapid advancements in generative and agentic AI tools could disrupt traditional service delivery models. In the first half of February 2026 alone, Foreign Institutional Investors (FIIs) offloaded over **₹10,950 crore** from the sector, reallocating capital toward pure-play AI firms listed in the US. Despite the immediate price pressure, a shift in revenue structure is becoming visible. AI-centric engagements now account for nearly **74%** of all new contracts signed over the last six quarters. Major players like TCS and Infosys are reporting significant traction, with TCS reaching an annualized AI services revenue of **$1.8 billion**. HCLTech also recently crossed the **$15 billion** annual revenue milestone, bolstered by AI-led engineering innovations. Valuations have become a focal point for long-term investors. The sector's Price-to-Earnings (P/E) ratio has moderated to **22.1x**, falling slightly below its 10-year historical average of **21.6x**. Analysts suggest this correction may be nearing a cyclical bottom. While revenue growth for large-cap firms is projected at a modest **4.5% to 6%** for the upcoming fiscal year, the transition from labor-intensive "effort" to value-based "outcomes" is expected to support margins in the long run. Domestic IT spending in India remains a bright spot, projected to reach **₹15.14 lakh crore** (approximately **$176 billion**) by the end of 2026. This growth is fueled by massive investments in data center expansion and local AI infrastructure. Additionally, the government has allocated **₹2,000 crore** in the latest budget to further accelerate national AI adoption. Looking ahead, the market is closely monitoring upcoming contract expiries for signs of short covering. While the immediate outlook remains cautious due to global macroeconomic uncertainty and the evolving AI landscape, the robust deal pipeline—with median year-on-year growth of **26%**—indicates that demand for digital transformation remains intact. The sector is increasingly viewed as undergoing a structural evolution rather than a terminal decline.