Foreign Investors’ India Bet Shrinks To Decade Low As AI Trade Draws Capital Away

Foreign portfolio investors' cumulative net equity investments in India have fallen to their lowest level in nearly a decade, highlighting how global capital is increasingly shifting away from the country's stock market amid slowing earnings growth, energy-related macro pressures and the global artificial intelligence investment boom.

According to data from the National Securities Depository (NSDL), aggregate net investments by foreign portfolio investors in Indian equities stood at ₹7.3 trillion as of June 1, the lowest level since 2016. The figure captures cumulative annual investments and withdrawals by foreign investors since 1993 and reflects the sustained selling pressure witnessed over the past year.

The decline marks a significant shift for a market that was widely regarded as one of the most attractive destinations for emerging-market investors. India has recently slipped out of the world's five largest equity markets by market capitalisation, overtaken by technology-heavy markets such as Taiwan and South Korea that have benefited enormously from global demand linked to artificial intelligence and semiconductor infrastructure.

Analysts say India's limited exposure to the AI supply chain, combined with concerns around growth and inflation following the oil shock triggered by the US-Iran conflict, has weakened its appeal relative to competing emerging markets.

"We expect FPI flows to stay muted, given India's low attractiveness versus other EM markets," Kotak Institutional Equities strategists led by Sanjeev Prasad said in a recent note. The brokerage noted that India's near-term earnings growth is expected to lag commodity- and technology-oriented emerging markets, while the country remains largely absent from the AI and semiconductor cycle that could continue driving global capital allocation for the next one to three years.

Domestic Investors Fill The Gap

Even as foreign ownership declines, domestic institutional investors have emerged as a powerful counterbalance.

According to JM Financial Institutional Securities strategist Venkatesh Balasubramaniam, foreign investors' ownership of listed Indian companies has fallen to around 15% from nearly 20% a decade ago. In contrast, domestic mutual funds now control close to 20% of the market, supported by steady inflows from retail investors through systematic investment plans and other investment channels.

This shift in ownership patterns has helped cushion Indian markets from the impact of foreign outflows and has contributed to the resilience seen in domestic equities despite persistent selling by overseas investors.

Markets Recover After Four-Day Losing Streak

Despite concerns around foreign investor participation, benchmark indices recovered on Tuesday and snapped a four-session losing streak.

The Sensex rose 382.50 points or 0.52% to close at 74,649.84, while the Nifty50 gained 100.95 points or 0.43% to settle at 23,483.55.

Technology stocks led the recovery, with TCS and Infosys surging more than 6% each. HCLTech and Tech Mahindra also posted strong gains, helping the Nifty IT index advance more than 4%, making it the best-performing sector of the day.

Broader markets also participated in the rebound. The Nifty Midcap 100 index gained 0.19%, while the Nifty Smallcap 100 rose 0.40%. Investor sentiment was aided by a sharp decline in volatility, with India VIX falling 7% to close at 15.3.

Focus Shifts To Domestic Triggers

Vinod Nair, Head of Research at Geojit Investments, said markets recovered from early losses as investors accumulated large-cap stocks amid improving valuation comfort.

"Markets recovered from initial losses, led by gains in the IT sector, while continued accumulation in large-cap stocks reflected comfort with valuations, as the Nifty 50 trades closer to its long-term averages than the relatively richer valuations in broader markets," he said.

Nair added that while uncertainty surrounding a Middle East truce remains, global sentiment has stayed resilient. With the earnings season largely behind, investor focus is now shifting toward key domestic factors including monsoon progress, inflation trends, RBI policy decisions and liquidity conditions.

He noted that the expected advance of the monsoon into southern regions could provide near-term support to sentiment. However, investors will continue to monitor rainfall patterns closely after the India Meteorological Department recently lowered its monsoon forecast and concerns over El Niño resurfaced.

While domestic investors continue to provide support to Indian equities, the latest NSDL data highlights a broader challenge facing the market: attracting foreign capital back at a time when global investors are increasingly chasing opportunities linked to artificial intelligence, semiconductors and technology-led growth elsewhere in Asia.