India AI gap in 2026: 7 signs global flows shifting

Why India’s ‘market darling’ narrative is being questioned

India is emerging as a clear laggard as the artificial intelligence trade reshapes global investment flows. After a multi-year run that pushed domestic equities into global portfolios, the market is now facing a different challenge: limited listed exposure to the AI buildout that is lifting parts of North Asia and the US. Several strategists argue this is not just a short-term valuation or earnings story. Instead, it is about how global investors are repricing future growth and long-duration “terminal value” assumptions for markets that sit inside the AI supply chain.

India’s market size is at risk of slipping globally

India’s equity market is described as being on the verge of dropping out of the world’s five biggest for the first time in three years. The pressure is visible in market value math since the 2024 peak. India’s market value rose to a record $1.73 trillion in September 2024, but $124 billion of market value has evaporated since then.

That drawdown has coincided with rising concern that India’s benchmark-heavy exposure is still anchored to domestic consumption and traditional sectors, while incremental global capital is chasing AI-linked themes elsewhere.

The AI trade is changing what “EM leadership” looks like

A key point in the re-rating is that investors want direct exposure to chip manufacturing, computing infrastructure, hyperscalers, and foundational model companies. The article notes that India has talent, demand, and digital scale, but few corporate champions that are directly linked to the AI infrastructure buildout. As a result, India risks falling further behind rather than regaining lost ground, even if domestic fundamentals are not the central problem.

Gary Dugan of Global CIO Office framed this as more than an “earnings miss” issue, arguing markets have not fully priced the long-term shift in assumptions about where businesses will be in 10 years.

MSCI reweighting shows the scale of the reallocation

The shift is also reflected in global index positioning. India’s weight in the MSCI Emerging Markets Index has fallen to about 12% from 19% last year. M&G Investments estimated that roughly two-thirds of the reallocation from India over the past 12 to 18 months reflects AI positioning.

Aadil Ebrahim of Klay Group said global capital is “taking note” as the world reprices around AI, and warned that India could remain structurally underweight in the AI trade until indices reflect a new generation of innovators.

Performance gap: Korea and Taiwan’s AI benchmarks vs India

The rotation has been described as largely moving toward South Korea and Taiwan. The article cites AI-powered equity benchmarks in those markets being up 78% and 42% this year, respectively, while India’s gauge is down more than 9% and heading toward its first annual drop after a decade of gains.

Motilal Oswal Financial Services, in its strategy report The Eagle Eye - May 2026, argued that India’s headline underperformance since the start of 2026 is driven primarily by minimal participation in the AI hardware and semiconductor rally. The report cited South Korea up 77.49% year-to-date by May 2026 (in one data point) and also said Korea was up 53% in USD terms in CY2026 so far, with Taiwan up 33% and Brazil up 28%. In contrast, it said India’s Nifty declined 13% in USD terms, and another figure in the text puts Nifty down about 8.5% year-to-date in local currency.

Foreign flows: $1.75 trillion in chip giants vs $150 billion in India

A separate datapoint underlines how concentrated AI exposure has become in global portfolios. Nomura estimates foreign institutional investors hold about $1.75 trillion in just three global semiconductor companies: Samsung Electronics, TSMC, and SK Hynix. That exceeds their exposure to India’s equity market, estimated at about $150 billion.

Foreign selling pressure has also been persistent. The article cites cumulative FII outflows of over $10-35 billion across primary and secondary markets between 2024 and 2026 year-to-date. In calendar 2026 alone, net selling has already crossed Rs 1 lakh crore ($12-13 billion), including Rs 56,000-70,000 crore ($1.5-8 billion) in March.

India’s IT sector: slower growth, AI revenue still too small

India’s IT sector, historically one of the market’s most dependable wealth creators, is now being assessed differently as AI changes delivery models. Growth guidance has narrowed sharply versus the double-digit expansion the sector was known for. Infosys has guided for 1.5% to 3.5% growth, while Wipro guided for a possible decline of up to 2% in the near term.

Several comments in the article emphasize that AI revenues are growing but not yet large enough to offset a slowdown in traditional services. The harder test is whether AI conversations turn into large, revenue-moving deals. Navy Vijay Ramavat of Indira Securities said global markets like the Nasdaq are hitting highs because of AI, while “India has missed that AI run,” and added that the negative impact of disruption may arrive before the full upside.

Jobs, exports, and the macro channel investors are watching

The structural concern goes beyond equity returns. The article notes India’s tech ecosystem employs about 5.8 to 6 million people and generates about $122 billion in software and IT services exports in FY25, as per NASSCOM. Kotak Mahindra AMC’s Nilesh Shah described AI as potentially “the opportunity of a lifetime or the risk of a lifetime” for India depending on positioning, warning that rapid adoption could disrupt programming, BPO/KPO, and enterprise services and potentially erode FX revenues, with spillovers into real estate, autos, and consumption.

Key numbers at a glance

What could change the narrative from here

Multiple strategists argue the immediate issue is India’s lack of investable, listed AI value-chain exposure. Motilal Oswal and Kotak’s reports both point to the same mechanism: if the AI trade moderates or unwinds, flows could rotate back toward markets driven by domestic growth, and India could benefit.

Kotak’s strategy note also warned India could act as a “funding market,” where investors sell Indian equities to fund AI-heavy trades elsewhere, at least until the AI excitement cools. Kotak’s domestic earnings view remained constructive, projecting Nifty earnings growth of 10% in FY26, 16% in FY27, and 14% in FY28, with Nifty EPS rising from Rs 1,097 in FY26 to Rs 1,460 in FY28, implying a forward P/E of 17.8x by FY28.

Conclusion

India’s underperformance is being framed less as a domestic macro breakdown and more as a structural exposure gap to a narrow, hardware-led AI rally. The next inflection for flows, according to the reports and investors cited, will depend on how long the global AI trade stays crowded, and whether a rotation opens space for India’s domestic growth narrative to regain leadership.