Domestic information technology (IT) stocks suffered their steepest single-day decline in four months on Wednesday, a day after posting their biggest rally in more than a year.

The Nifty IT index fell 5.6 per cent, its sharpest one-day drop since February 4, 2026. The market capitalisation of the index constituents declined by nearly ₹1.5 trillion.

The rout was led by Tata Consultancy Services (TCS), India’s largest software exporter, which slumped 8.3 per cent — its biggest single-day fall since March 13, 2020. At ₹2,242, the stock closed at its lowest level since August 28, 2020.

The decline wiped out most of the gains accumulated over the previous three sessions, during which the Nifty IT index had advanced 7.6 per cent on optimism that rising enterprise spending on artificial intelligence (AI) could create new opportunities for software services companies.

Investor sentiment, however, turned cautious following weakness in US technology stocks overnight. The Nifty IT index is down 22.4 per cent so far in 2026 amid concerns that AI-driven productivity gains could reduce demand for traditional outsourcing services.

Kotak Institutional Equities said its outlook on the sector had turned “incrementally negative”, warning that the risk of AI-driven revenue deflation could intensify over the next few years.

“We expect new opportunities such as legacy modernisation to increase, but do not expect them to compensate for the deflation enough,” analysts led by Kawaljeet Saluja said in a note.

Market experts said the wealth-creation phase for large-cap IT stocks may largely be behind them, though the sector could continue to offer tactical trading opportunities.

“These are large, liquid companies, and sentiment can periodically swing in their favour. But structurally, the industry’s growth prospects have slowed considerably. Earlier, the sector was capable of delivering much higher growth rates; now, growth is likely to remain in the low single digits, around 0-3 per cent. In that sense, these companies risk evolving into mature businesses that generate steady cash flows and return capital to shareholders, rather than delivering strong revenue growth and significant wealth creation,” said Chokkalingam G, founder of Equinomics.