Foreign Institutional Investors’ (FIIs) allocation to the Indian technology sector stood at an all-time low of 7.3% at the end of March. Ganesh Shirsekar/fileIndian IT companies are facing a double whammy from the advent of artificial intelligence (AI).Not only are future business orders under risk, the increasing use of AI in workflows by the same tech firms is leading to what is called ‘AI deflation’ — or reduction in order values as efficiencies reduce costs, which is then passed on to customers.This, naturally, has hit their share prices, with the National Stock Exchange’s benchmark Nifty IT index down 23% so far in 2026. Infosys and HCL Technologies have fallen 27-28% in that period.Foreign investors, a key player in the capital markets, have taken a particularly tough view of the Indian IT sector, cutting their shareholding in the top companies in FY26 by over three percentage points on average.In fact, Foreign Institutional Investors’ (FIIs) allocation to the Indian technology sector stood at an all-time low of 7.3% at the end of March compared to 10.1% at the end of FY25, according to brokerage Motilal Oswal Financial Services.Among India’s top-nine IT services companies, Coforge saw the largest decline in FII holding – 9.6 percentage points – during FY26. Infosys and Tech Mahindra saw a reduction in FIIs shareholding by over 4 percentage points. Wipro was the only one of the nine in which FIIs left their stake largely unchanged.Also Read | Oracle lays off around 12,000 employees in India: How this marks a wider pivot to AIMost of these companies, barring Tech Mahindra, Wipro, and LTM (formerly LTIMindtree), saw FIIs reduce their stakes in January-March – the quarter in which concerns about AI eating into business intensified after US-based Anthropic rolled out legal plugins for its Claude chatbot as analysts expressed worries that these tools could render the Indian IT services sector obsolete.Story continues below this adThe hit to the Indian IT sector has been sufficiently large to be a drag on the entire Indian stock market, with the Nifty 50 down 0.2% over the last one year. So far in 2026, FIIs have sold $21.6 billion of Indian equities – more than the $18.9 billion they sold in all of 2025 – of which $2.4 billion worth of net sales have been of Indian IT stocks (until April 15). As a result, FII holdings in the IT sector reduced to $41.4 billion from $59.8 billion at the end of 2025.NewsletterFollow our daily newsletter so you never miss anything important. On Wednesday, we answer readers' questions.SubscribeFIIs have continued to lower their holding of IT companies even though many experts think valuations in the sector, especially for large-cap companies, are now fair post the sharp correction in stock prices. Meanwhile, domestic institutional investors (DIIs) – consisting primarily of mutual funds and insurance companies – have increased their stake in technology companies that are part of the NSE 500 universe by 4 percentage points in FY26 to 22.3%.To be sure, this has been part of a broader trend.“On a year-on-year basis, DIIs raised their holdings in 21 out of 24 sectors. The maximum increase in holdings was visible in Private Banks, Technology, Telecom, Real Estate, Healthcare, and NBFC – Lending,” Motilal Oswal said on Tuesday.Story continues below this adMythos shock | Why regulators in India, other nations are spooked by Anthropic’s new toolExperts remain mixed on the IT services sector. While some are cautious due to concerns regarding the outlook for their earnings due to the increasing adoption of AI, some fund houses have seized onto the opportunity offered by cheaper valuations to accumulate shares of these companies.“AI deflation is becoming a reality (our base case is 3.5% for the industry), even as there is a timing lag in new programmes, resulting in weaker-than-expected growth guidance. Stock valuations are inexpensive for a sector that does not have much going for it,” Kotak Securities said in a report last month.