A slew of downgrades of Indian stocks by foreign brokerages, Reserve Bank of India’s (RBI) caution on growth and domestic IT companies’ weak revenue guidance for FY27 indicate stress and fragility in India’s investment sentiment. The caution stems from multiple fault lines—artificial intelligence (AI) disruption, selective private capital expenditure, surging crude oil prices and earnings downgrades amid a gush of foreign investor money outflows.

The convergence of global uncertainties and shocks are going to be a real stress test of India’s growth resilience, raising doubts whether the country can sustain its premium valuations while maintaining fiscal discipline and industrial competitiveness. The combined warnings by foreign investors and IT sector guidance post March quarter earnings reflect how vulnerabilities are translating into real business impact.

Global brokerage firm Bernstein has warned of structural weaknesses in India. In an open letter to Prime Minister Narendra Modi, Venugopal Garre and Nikhil Arela, analysts, Bernstein, raise questions on the long-term structural risks for India’s economy. “The global cycle is turning faster, supply chains are being redrawn and India still trails key peers on physical infra, innovation capacity and preparedness for the next technology wave…the risk is that India becomes a user of these technologies without capturing a commensurate share of the upside,” they say.

HSBC and JP Morgan, too, have downgraded Indian equities on fears of potential inflation and demand pressures impacting earnings growth.

The concerns are also mirrored at home-front businesses. India’s IT majors Infosys and Wipro—long seen as bellwethers of global competitiveness—have given weak revenue guidance for FY27, citing weaker demand and margin pressures. This is somewhat similar to what Bernstein has highlighted in the letter to the prime minister, warning how global headwinds and technological disruption are already weighing on corporate performance.

Bernstein’s focus strategy

Bernstein suggests eight critical areas of focus and possible solutions to recharge the India story and move it away from a low-end labour arbitrage model to a higher productive track. These include reviving monsoon-dependent agri-income, fixing energy crisis, AI disruptions eating millions of jobs, pushing manufacturing, reassessing infrastructure priorities, subsidies compromising capex, focusing on R&D and improving public services.

“India does not lack capital, talent or ambition. What it requires now is a sharper willingness to take difficult decisions early rather than deferring them. The window to act is still open, but it is narrowing,” the Bernstein analysts say.

They say that nearly 42 to 45 percent of India’s workforce (agriculture) continues to depend on a sector that contributes only 15 to 16 percent of gross domestic product (GDP). The rollback of the farm laws has made future reforms more difficult, but it has not made it any less necessary. There is no alternative but to restart this process with a more calibrated approach: Irrigation must be scaled up meaningfully to reduce weather dependence.

Bernstein analysts also caution that India’s AI strategy faces structural risks. While India is building data centre capacity, a major chunk of investment is import-heavy and global AI workloads are unlikely to shift significantly due to latency and regulatory barriers. Crucially, India lacks ownership of frontier AI models, leaving it dependent on global platforms.

Without domestic capability, India risks remaining a consumer in the AI economy, with US tech firms capturing most application-layer value. To avoid this, policy must prioritise foundation model development, compute infrastructure and data governance that ensures national value creation, Garre and Arela say.

“India’s IT services and BPO sectors, which have been a key driver of income mobility are considered at risk as AI models evolve—timeframes of impact may vary but risk appears inevitable. Policy must therefore take a more strategic view—supporting domestic development of foundation models, building compute capacity and ensuring that data governance frameworks prioritise national value creation,” Bernstein analysts explain.

Downgrades by global brokerages

Given India’s reliance on imported energy and the potential knock-on effects on inflation and domestic demand, HSBC is concerned about the durability of the ongoing earnings recovery. HSBC has downgraded Indian equities to ‘underweight’ rating.
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“We expect consensus forecasts to be revised down in the coming months from current expectations of 16 percent year-on-year for 2026. While valuations have corrected materially from their peak, they will appear elevated as earning downgrades feed through. India looks less attractive than its Northeast Asian peers in the current macro environment,” say Prerna Garg and Adam Qi, equity strategists at HSBC.

They add that India’s growth has showed signs of improvement in the last two quarters, but they think the recovery from hereon will be delayed. In addition, investors are increasingly focussed on the potential implications of AI, particularly for software
services. Together, these factors are likely to constrain foreign inflows, Garg and Qi say.

Meanwhile, JP Morgan has also downgraded Indian equities to neutral due to elevated valuations compared to emerging market peers and pressure on earnings from energy supply shocks linked to the Iran war. “Surging crude prices could ‌stoke inflation and growth risks for the country, squeeze consumption and weigh on near-term corporate margins, with a weakening rupee adding to the pressure,” JP Morgan analysts say.

Indian IT weak revenue guidance for FY27

Domestic IT companies have reported disappointing quarterly earnings (March-ended quarter) and cautious growth forecasts for FY27. Infosys’s guidance for FY27 is maintained at 1.5 to 3.5 percent in constant currency terms.

According to Abhishek Pathak, analyst, Motilal Oswal Financial Services, Infosys guidance reflects increasing pressure. “It tells us that AI is now compressing the existing books of business. While part of this is attributable to competitive intensity and pricing in a low-demand environment, we expect the impact of deflation to continue as AI productivity benefits are passed on to clients,” he says.

Wipro management guided for soft Q1 revenue growth of -2 percent to nil constant currency quarter over quarter, which includes contribution from two acquisitions announced in March.

“Q1FY27 margins of Wipro are likely to be impacted by the two-month wage hike, ramp-up of large deals (with lower initial margins) and continued investments in capabilities and AI platforms. While some quarter over quarter volatility is expected, the management aims to sustain margins within a narrow band over the medium term through operational efficiencies,” say analysts at Nuvama.

RBI’s stance on growth

Three key risks emerge from the Monetary Policy Committee (MPC) commentary on inflation. First, members are cognisant of the sensitivity of their outlook on the duration and intensity of the Middle East conflict.

Second, members flagged the upside risk to food inflation from El Niño disturbances, even as two RBI members stated that they see the food inflation outlook as favourable. Third, reading between the lines, we think it is evident that much of the comfort on inflation is predicated by the largely unchanged retail prices of key fuels.

“This suggests that a potential increase in petrol and diesel prices could disrupt the MPC’s benign inflation outlook,” says Nomura.

The minutes of the RBI’s April MPC meeting suggest that despite upside risks to inflation, most members are drawing comfort from low underlying inflation pressures, while the external members are concerned with the downside growth risks.

“Food price outlook remains comfortable in the near term with robust rabi production, adequate reservoir levels and comfortable buffer stocks of foodgrains. The likely emergence of El Niño conditions could pose a risk,” the RBI says.

The MPC appears largely comfortable with inflation, despite the RBI’s upward revision of its CPI inflation projection to 4.6 percent year over year in FY27.