India's economic growth story remains intact, but global investors are becoming more demanding about where they put their money.
Artificial intelligence has changed that calculation.
As spending on chips, servers, data centres and related infrastructure accelerates, markets with direct exposure to the AI supply chain are competing more effectively for international capital. Taiwan has emerged as a major beneficiary, while India, whose equity market is weighted more heavily toward financial services, consumer businesses and traditional technology services, offers a different proposition.
That divergence is beginning to show up in portfolio positioning.
An August Bank of America survey found a net 32% of respondents were underweight India, leaving it the least-favoured regional market among those surveyed. The Asia portion of the survey covered 105 investors managing $272 billion.
Some funds have taken more decisive action. Singapore-based Reed Capital Partners recently eliminated its Indian equity exposure while reducing portfolio risk. Chief Investment Officer Gerald Gan summed up his assessment plainly: “There isn’t much going on for a good India story.”
That is one fund manager's view rather than a verdict on the market. Still, it reflects a broader problem confronting Indian equities: economic growth alone is competing against an unusually powerful investment theme elsewhere.
AI Is Rewriting Asian Portfolio Allocations
For global investors, the AI boom is no longer confined to a handful of US technology companies.
The infrastructure required to build and operate increasingly sophisticated AI systems reaches deep into Asian supply chains. Semiconductor manufacturers, memory-chip producers, server suppliers and other hardware businesses have become direct beneficiaries of rising capital expenditure.
Taiwan sits close to the centre of that ecosystem.
Foreign investors bought a net $11.15 billion of Taiwanese stocks in August, as overseas money returned to Asian equities after months of selling.
India participated in that regional recovery, but its listed market does not offer the same concentration of companies directly exposed to the semiconductor-led AI spending cycle.
Fund managers have noticed the difference.
In Bank of America's August survey, 28% of respondents identified the absence of a clear AI investment opportunity as their principal concern about Indian equities, up from 18% a month earlier.
Other concerns included weak growth expectations, cited by 20% of respondents, and a lack of reforms, cited by 16%. Currency depreciation accounted for 8%, while 4% pointed to high valuations.
The figures suggest that India's problem is not simply that investors have become pessimistic about the economy. Capital is being compared with opportunities elsewhere, and AI-related markets currently offer catalysts that are easier for portfolio managers to identify.
Foreign Ownership Has Already Fallen Sharply
The change in sentiment follows an extended period of foreign selling.
Foreign ownership of Indian equities has fallen to a 17-year low. By the first week of September, foreign portfolio investor withdrawals from Indian stocks had reached roughly ₹2.32 lakh crore in 2026, exceeding the ₹1.66 lakh crore withdrawn during all of 2025.
Those numbers are significant, but they should not be read as a continuous one-way exit.
August interrupted the trend.
Foreign institutional investors bought a net ₹29,631 crore of Indian equities during the month, the strongest monthly inflow in 23 months and the second consecutive month of net buying after four months of withdrawals.
Measured in dollars, overseas investors purchased about $3.1 billion of Indian stocks in August.
The rebound demonstrated that global investors remain willing to increase exposure when the combination of valuations, earnings expectations, economic conditions and currency risk becomes attractive.
September brought another change in direction.
Foreign portfolio investors withdrew ₹7,443 crore from Indian equities during the first week of the month. Higher crude-oil prices, rising US bond yields and a stronger dollar added to the pressure.
The recent pattern is therefore more complicated than a straightforward retreat from India. Long-term foreign ownership has declined, but short-term flows continue to move sharply in both directions.
India’s Valuation Premium Faces a Harder Test
For years, investors have been willing to pay more for Indian stocks than for many emerging-market peers.
The argument was straightforward: India's economic growth, expanding middle class, formalisation of the economy and domestic consumption offered the prospect of sustained earnings growth.
That premium becomes harder to defend when earnings disappoint or competing markets present stronger near-term opportunities.
India's MSCI price-to-earnings ratio stood at 23.88 times at the end of July. At that level, investors are paying for considerable future growth.
The AI cycle has made the comparison more demanding.
A global portfolio manager deciding between an Indian company trading at a premium and an Asian semiconductor business benefiting directly from rapidly expanding AI infrastructure spending is not necessarily choosing between a good economy and a bad one.
The decision is about earnings visibility, valuation and timing.
India can remain a compelling long-term market while still losing marginal capital to another region for a period.
India’s Technology Strength Lies Elsewhere
The shift toward AI-heavy markets does not mean India lacks an artificial-intelligence opportunity.
The country has one of the world's largest technology-services industries, an expanding digital economy, a substantial engineering workforce and growing investment in data centres and AI infrastructure. Startups and established technology companies are also developing and deploying AI products.
The difference is how that opportunity appears in public markets.
Taiwan and other parts of North Asia contain large listed businesses deeply embedded in semiconductor and electronics supply chains. Investors seeking immediate exposure to the physical infrastructure behind AI can access that theme relatively directly.
India's technology sector has historically been dominated by IT services. Its exposure to the AI investment cycle is therefore different and, in some cases, less immediate.
That distinction matters when global capital is concentrating on companies expected to benefit quickly from unprecedented spending on computing infrastructure.
Domestic Money Has Changed the Market’s Dependence on FIIs
Foreign selling would have posed a more serious structural challenge to Indian equities a decade ago.
The domestic investor base is now considerably larger.
Mutual funds, institutional investors and household savings channelled into equities have provided a substantial source of demand. That has reduced, though not eliminated, the market's sensitivity to foreign portfolio flows.
India's underlying macroeconomic data also continue to provide support for the investment case.
The economy recorded GDP growth of 7.8% in the first quarter of FY27. Better-than-expected corporate results and periods of greater rupee stability have also given foreign investors reasons to reconsider allocations.
August's strong inflows offered evidence of that flexibility. Global money can return rapidly when managers believe the risk-reward balance has improved.
The challenge is keeping it there.
The Contest Is for the Marginal Dollar
India does not need to become Taiwan to regain favour with international investors.
Its attractions are different: a vast domestic market, comparatively strong economic growth and companies positioned to benefit from rising consumption, financial penetration and infrastructure investment.
But portfolio managers do not allocate money on national growth rates alone.
They compare expected earnings, valuations, currencies, interest rates and sector opportunities across markets. The AI investment cycle has added an unusually powerful variable to that process.
For the moment, semiconductor-heavy markets offer a more direct route into one of the world's dominant investment themes. India's premium valuations make that competition harder.
A sustained improvement in foreign flows would probably require stronger earnings growth, reasonable valuations and greater confidence that India's economic expansion will translate into shareholder returns. A clearer investable technology and manufacturing story could strengthen the case further.
The sharp swing from August buying to renewed September selling shows how quickly international positioning can change.
Global investors have not written India off. They simply have more places competing for their next dollar.
