Rs 1.13 lakh crore boom in one corner, a bust in another: What changed in the AI trade?

Calls in the US to slow down artificial intelligence (AI) growth turned out to be a double-edged sword for investors on Dalal Street as the Nifty IT Index surged 5%, adding Rs 1.13 lakh crore in market value, even as stocks tied to the power and infrastructure buildout needed to support AI models fell as much as 6%.

The slowdown calls turned out to be good news for India’s battered software technology stocks as HCL Tech and Tech Mahindra gained 5% each while Infosys, LTIMindtree and Tata Consultancy Services (TCS) advanced 4%.

The move was exactly the opposite in the power play segment. TD Power slid 6% while Sterlite Technologies and GE Vernova T&D India lost 4%. HFCL, Hitachi Energy, CG Power and Siemens declined 2-3%.

The divergence reflects a rapid shift in investor positioning. Technology leaders, including representatives from Anthropic and OpenAI, have advocated industry-wide guardrails to address AI safety risks, prompting investors to rotate away from semiconductor manufacturers and other infrastructure beneficiaries and toward software companies.

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India’s IT stocks have been major laggards over the past year as new AI tools threatened the business models of traditional software services companies. But calls to slow the pace of frontier AI development are now offering the sector a potential reprieve, with investors betting that disruption may take longer to play out.
Analysts said when the narrative shifts from unchecked development to regulated and responsible use of AI, short-covering backed by fresh buying in frontline IT stocks is quite possible.The trigger was a call by Anthropic Chief Executive Officer Dario Amodei for AI companies to slow the pace at which they develop the technology. He called on Saturday for an industry-wide accord to “pace the frontier” and better control the breakneck progress of AI, citing the risk of attacks by swarms of AI agents going rogue.

“It’s my worry that in 6-12 months such a swarm could be capable of taking over the entire internet,” potentially causing hundreds of billions of dollars in damage, Amodei wrote in a 3,800-word post on his website.

His warning won support from OpenAI Chief Executive Officer Sam Altman and Elon Musk of xAI. The comments initially spooked markets, sending AI and other technology stocks lower and weighing on broader equity markets. But they also triggered a reassessment of the relative risks facing software companies and AI infrastructure providers.

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A more measured pace of frontier-model development could reduce concerns over rapid obsolescence and disruption for traditional software companies, while raising questions about the speed and scale of spending on chips, data centres, power and related infrastructure.

Valuations are giving investors another reason to revisit Indian IT stocks. The Nifty IT Index remains 37% below its record high and trades at about 16 times forward earnings—two standard deviations below its five-year average, according to data compiled by Bloomberg.

That depressed valuation leaves the sector more sensitive to any improvement in sentiment.

The implications for Indian IT could extend beyond short-covering. A more measured AI development cycle could give enterprises greater visibility on technology choices, reducing concerns around near-term obsolescence and encouraging customers that have adopted a wait-and-watch approach to resume technology spending, according to Choice Institutional Equities.

That would be incrementally positive for Indian IT companies involved in AI implementation, cloud transformation, governance and cybersecurity. It could also extend the monetisation window for technology vendors, giving them more time to offset productivity-led pressure on legacy services.

The structural risk remains that AI-driven productivity gains are passed on to clients, putting pressure on the pricing and revenue of traditional services companies. The key monitor, according to Choice, will be the pace of AI-led revenue creation relative to productivity-led deflation.

The market’s reassessment is also raising questions around the infrastructure commitments made in anticipation of accelerating AI demand. Anthropic is preparing for an imminent initial public offering to raise billions of dollars for development and massive data centres supporting its power-hungry models. Altman, meanwhile, has said OpenAI will not pursue an IPO this year, calling it “ill advised” amid the safety concerns.

The developments have revived investor worries over “circular investments,” in which AI companies invest in one another. Nvidia, the AI-chip behemoth, has been described as the “central bank of AI” for providing large amounts of infrastructure financing to companies around the world.

Companies have also committed to building their own power plants, supporting demand in so-called picks and shovels sectors such as construction and logistics.

The near-term direction of Indian IT stocks will also depend on the Federal Reserve. Markets are pricing in about a 90% probability of a 25-basis-point rate cut at the September 16 decision, according to Choice Institutional Equities. Fed guidance, US yields and inflation commentary will remain important drivers for Indian IT companies given their high exposure to North America.

(Disclaimer: This article has been written by Nikhil Agarwal, who is not a SEBI-registered Research Analyst or an Investment Adviser. Nikhil Agarwal and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here)