As global AI trading cools and tech stocks experience sharp volatility, the Indian stock market, which had long lagged due to its lack of AI-themed stocks, has instead become a key destination for the reallocation of international capital.
Over the past month, India's Nifty 50 index has gained about 1%, bucking the trend while the MSCI Emerging Markets Index has fallen over 9%. As the market shifts from chasing AI themes to seeking defensive assets, India's market structure with its "low AI exposure" is being revalued. Concurrently, falling oil prices, a stabilizing rupee, and improving corporate earnings expectations are further reinforcing the logic for capital to flow back.
The CEO of Citigroup India, K. Balasubramanian, after engaging with 36 US institutional investors, noted that India's market downturn cycle, which lasted about 18 months, is rapidly nearing its end, with overseas investor interest in Indian assets showing a clear resurgence.
The 'No AI' Factor as a Strength, Market Volatility Declines Significantly
In the first half of this year, the AI investment frenzy propelled markets like South Korea, with a high proportion of tech stocks, to outperform consistently, while the Indian market, lacking major AI tech companies, initially underperformed. However, as the heat from AI trading subsides, investors are re-evaluating their asset allocation, and India's lower AI exposure has turned into an advantage.
According to Bloomberg, Maxence Visseau, Chief Investment Officer at Arkevium Capital, stated that India's biggest characteristic is being "outside of the AI trade," allowing it to play a role in diversifying risk and reducing portfolio volatility within an emerging market portfolio.
This advantage is also reflected in market performance. In the first half of 2026, the Nifty 50 index had only 38 trading days with a daily gain or loss exceeding 1%, accounting for about one-third of all trading days. This is significantly fewer than the 59 days for both the MSCI Emerging Markets Index and the MSCI Asia Index. In the same period, South Korea's KOSPI index had 79 such days, making it one of the markets most visibly impacted by AI trading.
Global capital is shifting from highly concentrated AI positions towards more balanced regional allocations. South Africa's Coronation Asset Management, with assets under management of approximately $47 billion, reduced the combined holdings of SK Hynix and TSMC in its emerging markets fund from 8% to 5% in the second quarter, while raising its allocation to the Indian market to nearly 12%.
Falling Oil Prices, Stabilizing Rupee, Improving Fundamentals Provide Support
Supporting this capital inflow, improvements in India's macroeconomic fundamentals also play a crucial role.
International oil prices have retreated from highs above $100 per barrel during recent Middle East conflicts to around $70, and the Indian rupee has gradually stabilized after hitting record lows. Given that India relies on imports for over 90% of its oil and gas needs, the decline in energy prices suggests that imported inflationary pressures are easing, while also helping to improve the fiscal position and current account balance.
According to Bloomberg, Ben Powell, Chief Investment Strategist for the Middle East and Asia Pacific at BlackRock Investment Institute, stated that several factors that previously weighed on the Indian market—including high oil prices, elevated valuations, and the lack of an AI theme—are gradually fading, creating conditions for international investors to reallocate to Indian assets.
Analysts including Ridham Desai from Morgan Stanley noted in a report that India is gradually evolving into a "larger macro asset class." In recent years, its inflation volatility has consistently decreased, giving it both growth and defensive attributes, which enhances its appeal in global asset allocation.
Kruti Shah, a quantitative analyst at Equirus Securities, believes the overall trend for the Nifty 50 index remains bullish. The upcoming earnings season could serve as a catalyst for the next phase of market gains if corporate profits exceed expectations.
High Valuations Remain the Primary Constraint
However, valuation remains the core challenge currently facing the Indian market.
Following the recent rebound, Indian stock valuations have climbed again. Bloomberg Intelligence analysts Nitin Chanduka and Peggy Lim pointed out that the median price-to-earnings ratio for constituents of the Nifty 500 index is about 33 times. While this is below the 2023 peak, it remains significantly higher than the historical average. Overall, India remains one of the markets with a high concentration of expensive stocks globally—over 30% of the constituents in the NSE 500 index have P/E ratios exceeding 50 times.
Simultaneously, fundamental factors also present concerns. Weak monsoon rains could drag on agricultural production and household consumption. Barclays economists noted that although the rainfall deficit has narrowed to 24%, overall precipitation remains below normal levels, with sowing progress for pulses and rice lagging behind last year's pace. Additionally, the foreign investor capital gains tax policy has yet to be adjusted, continuing to dampen the willingness of overseas capital to return.
Nilesh Dhedhi, CEO of Avendus Finance, believes that the "most difficult phase for the Indian market is over," but the current environment is more likely to only help slow the pace of capital outflows, insufficient to reverse the overall trend of net foreign outflows amounting to approximately $29 billion so far this year.
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