Investing.com - The Indian IT services industry has benefited from more companies pushing to find cheaper services, but faces headwinds from an uncertain discretionary environment, according to analysts at Bernstein.

In a note to clients, the analysts laid out two typical scenarios for growth in the sector: one based on a stable macroeconomic environment, the other on a downturn in growth.

During times of solid economic activity, IT firms in India are typically boosted by a combination of U.S. gross domestic product expansion, momentum in outsourcing by companies, and market share gains, the analysts led by Rahul Malhotra noted. The brokerage added that, collectively, these trends deliver annualized growth of 9%.

Periods of economic contraction, on the other hand, compress this model, anchoring growth in the sector at roughly 3% year-on-year, the analysts said.

"We believe the industry today is ’somewhere in the middle’," the analysts wrote.

Discretionary spending by businesses on IT services, which has been weighed down in recent months by elevated interest rates and inflationary pressures, is showing some early signs of recovery, although "overall confidence in a broad based rebound" remains uncertain, the analysts flagged.

Meanwhile, Indian IT services firms are tipped to boosted by more companies prioritizing cost-cutting deals, they said.

Indian IT businesses are now tipped to grow by between 6% to 8% year-on-year in the 2026 financial year, before recovering back to the more "normalized" rate of 9% to 11% in 2027, the analysts predicted.

Infosys (NYSE: INFY ) was the analysts’ top pick among large cap names in the second, citing margin resilience and stronger client relationships. Within small- to medium-sized players, specialized software company Coforge (BO: COFO ) was preferred by Bernstein.