In the last one year, the MSCI Emerging Market Index gained 23%, and the MSCI Asia Pacific Index rose 21%. In sharp contrast, the MSCI India Index is down 1% in dollar terms, making it one of the worst-performing major markets globally.
Unlike the US, China, Japan, South Korea, and Taiwan, where AI-led companies have driven incremental market value, India has few pure AI plays. Its listed space remains dominated by traditional players such as banks, industrials, and consumer companies. In the last one year, AI trade has added $6 trillion in market cap to the US stock market, while China has seen a value addition of around $700 billion.
According to Kotak Equities, “The lack of integration of India in the global AI value chain and high valuations across sectors have made India a natural funding market for AI-driven global capital flows.” Simply put, as investors chased the global AI boom, they booked profits in expensive Indian equities and moved capital to markets hosting AI leaders like Nvidia, TSMC, and Samsung.
That capital rotation has shown up clearly in flows, foreign institutional investors (FIIs) have pulled out more than Rs 1.5 lakh crore from Indian equities over the past one years, largely redirecting funds toward AI-heavy markets.
Beyond the absence of AI-linked growth, India’s underperformance also stems from stretched valuations and muted earnings growth. Over the past 12–15 months, analysts have cut Nifty earnings forecasts multiple times, and despite signs of improvements, the index still trades at 23.2 times FY26 and nearly 20 times FY27 earnings, well above emerging market averages.
AI fatigue could be India’s opportunity
Ironically, India’s exclusion from the AI mania might now work in its favor. As the AI trade cools, India could see renewed foreign investor interest as capital rotates toward broader, more balanced growth markets.
Ross Maxwell, Global Strategy Lead at VT Markets, believes that if AI-heavy stocks continue to correct, “the attractiveness of diversified, growth-focused markets such as India could strengthen.”
He adds, “If the AI bull run shows weakness due to profit-taking or valuation concerns, FIIs who have been underweight on Indian equities may see this as a cue to rebalance. A pullback in global tech valuations could set the stage for renewed inflows into India, particularly if domestic reforms and fiscal discipline continue.”
Echoing this view, Abhinav Tiwari, Research Analyst at Bonanza, says, “If the ongoing AI rally cools down or an AI bubble bursts, India could benefit and see the return of FIIs. India’s appeal lies in its solid macro fundamentals, robust consumption, and healthy corporate earnings growth of 13–16% expected over FY26–27.”
Kotak Equities notes that AI companies’ valuations assume “mind-boggling implied revenue and profit pools.” For example, OpenAI’s expected $1–1.5 trillion investment base would require annual cash returns of $100–150 billion to justify valuations, a target far from current reality.
If investors start to question such assumptions, even a mild correction could prompt a global portfolio shift. “India’s equity markets are a good AI hedge,” HSBC wrote in a recent note, recommending an ‘overweight’ stance on Indian equities, calling them “a diversification play for investors uncomfortable with the AI rally.”
India’s GDP growth above 6% and moderating inflation have kept its fundamentals strong even as valuations looked expensive. Domestic flows remain robust, helping cushion volatility.
According to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, “If the correction in AI stocks is gradual and mild, it will be beneficial for India, which is regarded as an AI-tech loser. Capital will move to non-AI markets. However, a sharp AI bubble burst could hurt everyone, including India.”
Analysts expect Nifty earnings to rise 10% in FY26 and 17% in FY27, supported by financials, infrastructure, and consumption sectors. That may help Indian equities reclaim investor attention, particularly if global tech valuations cool and risk appetite shifts back to emerging markets.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)