INDIA stands out as one of the biggest losers as the artificial intelligence (AI) trade reshapes global investment flows.
In a stark shift, the country’s stock market is on the verge of dropping out of the world’s five biggest for the first time in three years.
Without the AI-driven rallies powering Taiwan and South Korea, there’s a growing risk that India falls further behind rather than regaining lost ground.
The rationale goes far beyond Indian equities being relatively expensive or corporate earnings slowing.
Global investors, who not long pushed India close to rivalling China in emerging-market (EM) portfolios, are now chasing themes the country’s market largely lacks: chip manufacturing, computing infrastructure and AI models.
While India has talent, demand and digital scale, few of its corporate champions are directly linked to that buildout.
That increasingly leaves the market tied to the domestic consumption story.
“This isn’t a dip you buy,” said Gary Dugan, chief executive of Global CIO Office. “What markets haven’t fully priced yet is that this isn’t an earnings miss story in India, it’s a terminal value story.
“The assumptions about where these businesses are in 10 years have to change.”
Underscoring the scope of the revaluation, India’s weight in the MSCI EM index has fallen to about 12% from 19% last year. Roughly two-thirds of the reallocation from India over the past 12 to 18 months reflects AI positioning, according to M&G Investments.
As fund managers pared their exposure, foreign investors have been abandoning India at an accelerating pace, pushing their ownership to a 14-year low, according to Goldman Sachs Group Inc calculations.
They now hold less than domestic institutions for the first time in more than 20 years.
The change in India’s fortunes has been stark. Its market value soared from pandemic lows to a record US$5.73 trillion in September 2024, with the NSE Nifty 50 Index the world’s best-performing major market at the time.
That narrative began to fray as concerns over stretched valuations made foreign flows increasingly volatile.
Then came the AI boom, drawing investors away. Since the peak, US$924bil of market value has evaporated.
This year, the pressures piled up as a surge in oil prices is worsening inflation risks and pressuring the rupee.
Foreign investors are rushing to the exit – they have withdrawn a net US$42bil since the end of 2024.
The rotation has been largely toward Korea and Taiwan, which provide a sharp contrast with their AI-powered equity benchmarks up 78% and 42% this year, respectively.
India’s gauge is down more than 9%, heading for its first annual drop after a decade of gains. The two North Asian markets are less than US$500bil away from overtaking India in equity market value.
India’s case
“While the world reprices around AI, India’s headline indices remain anchored to the past – and global capital is taking note,” said Aadil Ebrahim, group head of equities at Klay Group. Until its stock markets “evolve to reflect a new generation of innovators, India will remain a structural underweight in the AI trade.”
At the core of the divergence is the very basis of the India investment case.
For decades, the working assumption was that the country would follow the East Asian playbook and climb the value chain from manufacturing to services, and then innovative technologies.
But that last jump has always been the hardest to make.
Perhaps the most poignant indicator of investors losing faith in India has been the rupee, which swooned to a record low against the dollar.
That’s forced Prime Minister Narendra Modi to plead with citizens to cut fuel use and avoid unnecessary travel, in an attempt to buttress the exchange rate.
“India is approaching a genuine strategic inflection point,” said Hebe Chen, an analyst at Vantage Global Prime.
“The next phase of global growth is being shaped by AI infrastructure, compute power and technological ownership that India has not yet secured.”
Instead, the very companies that have driven India’s success now increasingly look like liabilities.
The stock market is heavily weighted toward IT services, a US$315bil industry led by Infosys Ltd and Tata Consultancy Services Ltd.
The NSE Nifty IT Index has dropped more than 26% this year to around its lowest since 2023, caught in a broader global selloff in services and old-economy stocks exposed to AI disruption. To be sure, some investors believe that the worst is already done after a prolonged slump.
The IT industry’s Nifty weight has fallen to about 8% from more than 17% in early 2022. And the Adani Group is deploying its considerable resources for a data-centre push.
“Much of that reset has already happened,” said Vikas Pershad, portfolio manager at M&G. “What has not fully repriced is the assumption that India deserves a large multiple premium to EMs simply because its growth rate is higher.”
The sustainability of that growth is in question, though. As many as 15 million Indians work in IT services and global capability centres, many in some of the country’s best-paying private jobs.
A structural slowdown in hiring or a more fundamental shift in global demand for the services would ripple across the economy, into real estate, consumption, lending and the broader financial sector.
And while the impact on the wider economy is yet to be felt, growth forecasts are already moderating, in a challenge to the narrative of India as a high-growth play.
Gross domestic product will likely expand 6.5% in 2027 and 2028 each after an average annual rate of 8.3% in the last four years, the International Monetary Fund predicts. — Bloomberg
Abhishek Vishnoi is a Bloomberg Opinion columnist covering deals. The views expressed here are the writer’s own.
