RBI Warns Asian Equity Rally is Overly Narrow, Led by Few AI-Linked Tech Giants

The Reserve Bank of India has cautioned that the recent rally in Asian equity markets is being propelled by a narrow group of large technology stocks linked to artificial intelligence, raising the risk of sharp spillovers if US equities undergo a correction.

In its latest Financial Stability Report, the central bank noted that “optimism around AI is also evident in Asian indices, with big technology stocks driving most of the gains,” warning that such market concentration leaves equities vulnerable to abrupt shifts in investor sentiment and heightened volatility.

Concentration at the Top

Data cited by the RBI shows that equity returns are unevenly distributed across markets. In the United States, just seven stocks account for half of the S&P 500’s gains, while in Hong Kong six stocks contribute an equivalent share. The concentration is even sharper in parts of Asia, where two stocks explain half of the year-to-date gains in South Korea and a single stock accounts for 50% of Taiwan’s gains. While broader indices have posted strong year-to-date performance, with the KOSPI up 72.3%, the Hang Seng rising 27.4% and the MSCI Asia-Pacific gaining 23.5%, the RBI said these headline figures obscure the narrow base of contributors.

The central bank also flagged a significant global risk, warning that a major correction in US equities could evolve into a global systemic event, pulling down other markets and affecting equities across the region. It noted that because the performance of many Asian benchmarks is dominated by a small set of AI-linked stocks, a US sell-off or a sharp re-rating of these companies could trigger widespread volatility and capital outflows from emerging markets.

Risk in AI Boom

The RBI also drew attention to financing risks emerging from the AI investment boom. While large technology firms have so far relied mainly on internal accruals to fund AI infrastructure, the sheer scale of capital expenditure, running into trillions of dollars, is increasingly pushing companies toward higher leverage. The central bank warned that rising debt levels, coupled with complex and sometimes circular financing arrangements among firms, could amplify credit risks if market conditions deteriorate or cash flows weaken.

Taken together, the RBI said the concentrated nature of the rally poses two key concerns for markets and regulators. First, it heightens vulnerability to abrupt shifts in investor sentiment if a small cluster of heavily weighted stocks underperforms. Second, it raises broader financial stability risks as debt-funded AI capital expenditure builds up across balance sheets. The assessment serves as a caution to investors that tail risks from a narrow, technology-led rally may be underestimated, particularly in the event of a sharp correction in global equities.