Nearly 80% HR leaders see better retention in tier-2 and 3 cities as pay growth stays flat: upGrad Rekrut

As India’s technology sector grapples with a prolonged hiring slowdown and muted salary growth, companies are increasingly rethinking how they retain talent, shifting away from pay hikes towards structural workforce strategies, according to a new report by upGrad Rekrut.

The ‘2025–26 Talent Landscape & AI Integration Report’, based on responses from more than 3,200 HR leaders and tech professionals, finds that while overall hiring has moderated, employers are redesigning workforce models to maintain continuity rather than relying solely on compensation-led retention.

The slowdown, however, has been uneven. Nearly 79% of HR leaders said talent retention in Tier-2 and Tier-3 cities is equal to or better than that in Tier-1 metros. Reflecting this shift, tech hiring from these cities is expected to rise from 12.3% to 19.7% by FY27, signalling a move from cost-driven expansion to stability-focused planning.

The report also highlights a gender gap in the evolving talent landscape. While 65% of women professionals are open to roles in Tier-2 cities or hybrid work models, women currently account for only 35% of India’s tech workforce, pointing to a missed opportunity for workforce stabilisation in an employer-led market.

Even as demand for AI talent continues to grow, governance remains a weak link. Only 15% of organisations currently have formal AI governance frameworks in place, raising concerns around employee confidence, trust and long-term retention, the report said.

Husain Tinwala, President, upGrad Rekrut, said the findings reflect a shift from compensation-led to architecture-led retention. “In an environment of flat pay cycles and higher compliance costs, companies are increasingly using location strategy, workflow redesign and learning access as substitutes for wage escalation. Tier-2 cities are emerging as stability hubs not because they are cheaper, but because they offer lower attrition and longer workforce continuity,” he said.

Tinwala added that the model would hold only if hybrid work and AI governance mature in parallel. “Without these enablers, the same reset that improves retention for some segments could accelerate exits among women and mid-career professionals, turning AI-led growth into a churn risk rather than a capability advantage,” he said.

Separately, upGrad Rekrut’s operating data over the past 12 months showed a nearly 40% increase in placement mandates originating from Tier-2 and Tier-3 regions, driven largely by demand for AI engineers, data analysts and automation specialists. Sectors such as BFSI, IT services and manufacturing have led this demand.

Emerging hubs including Ahmedabad-GIFT City, Coimbatore, Kochi, Indore and Lucknow now account for close to one-fourth of all AI-linked hiring mandates handled by the company.