Emerging Markets Spotlight – March 2026

Key Points

• Recent AI advancements have weakened investor sentiment toward service industries, prompting concerns about how a slowdown in software and IT services might affect India’s economy.
• India’s growth cycle is often constrained by current account deficits, with IT service exports historically helping to offset large oil import payments.
• With IT stocks down sharply in early 2026, a genuine deterioration in global IT demand combined with higher oil prices could strain India’s current account and limit growth.

India’s IT Sell-Off: What Does it Mean for Growth?

The explosion in capability of AI models in recent months has led some equity market participants to become more cautious about the outlook for various service sector industries, leading to selloffs in sectors from software to financial planning. As investors who approach our asset class primarily through top-down, country-level developments, we have been thinking about what this might mean for India.

India is one of a group of emerging markets that tend to run current account deficits. These are countries that have significant latent domestic demand but where, for various historical, geographical, or institutional reasons, domestic production falls short. These markets tend to have higher beta to global liquidity and risk appetite. Most pertinently for India, the growth cycles of these countries tend to be constrained by inflation and external deficits, with both vulnerabilities reflecting demand running too far ahead of supply.

Since the end of 2010, India’s current account deficit has averaged 1.7% of GDP, although the maximum deficit was 5.1% of GDP.* The structure of the current account balance has developed through time, and changed with India’s economic cycle, but some components remain structurally important.

In 2025, India ran a deficit in non-oil goods of USD 189bn (4.9% of GDP). Net oil imports were USD 122bn (3.2% of GDP). The resultant trade deficit of USD 311bn (8.0% of GDP) was substantially offset by a net positive services balance of USD 210bn (5.4% of GDP). Notably, the surplus in IT services was USD 227bn (5.9% of GDP). India also ran a positive income balance of USD 85bn (2.2% of GDP), for an overall current account deficit of USD 17bn (0.4% of GDP).*
 
This relationship between IT service exports and oil imports is key for India’s economy, and the two have grown together. In fiscal year 2019, net IT service exports were USD 85bn and oil imports USD 93.9bn.* The varying cycles in global IT service spending and the oil price are key for the health of the Indian economy.

At a time of higher oil prices, what does the downturn in sentiment towards software and IT service stocks mean for India? In the first two months of 2026, MSCI India IT Index has fallen over 20% in USD terms.* This is concerning, because the aggregate revenue of India’s listed IT companies has a high correlation with the economy’s IT service exports. If the negative outcome that stocks are pricing in comes to pass, particularly with higher oil prices, India’s growth may be constrained by the current account balance.

However, it is important to note that the 12-month forward consensus estimates for both the revenues and profits of the constituents of MSCI India IT Index have increased by 3.4% year to date.* This steady growth in the fundamental outlook for these companies suggests both opportunity in the sector, where we remain overweight, and ongoing support for the Indian economic growth story, although we remain underweight the country on valuation grounds. We do not feel that share price moves alone constitute a macro-level signal for India at this time.

*Source: FactSet/Bloomberg.